You may have heard about the current low mortgage rate environment and how this may be a good time to refinance. This has become a hot topic in Singapore and around the world, with the recent economic situation causing interest rates to drop to all-time lows. This has made refinancing a favourable opportunity for those who are looking to take advantage of the current climate.
Here are some common scenarios where refinancing could potentially be the right move for your financial and personal situation. We explore these case studies and share how you can get most out of refinancing should you find yourself in the same boat.
Want to save more on your existing mortgage? Compare the best home loan rates in town or check out PropertyGuru Finance for more personalised advice and recommendations:
1. Your Mortgage Lock-in Period is Ending
Most home loan packages come with a stipulated lock-in period, during which you will incur a penalty for refinancing your loan. That’s why most homeowners prefer to wait until the lock-in period is over before refinancing.
Read about lock-in periods and more here: Housing Loans Guide: "Chim" Mortgage Jargon, Compiled and Explained for Beginners
But did you know: you don’t need to wait for the period to be over to start shopping around for a new home loan to refinance to. In fact, the best time to start exploring refinancing your home loan is towards the end of your lock-in period – this way, you can spend a few months comparing interest rates and home loans, and seamlessly ‘transfer’ your home loan to the new bank once your lock-in period is up.
If you wait until the lock-in is over to start looking around, the entire process may take a few months and you will need to pay a higher interest rate until the refinancing is complete.
2. You Want to Switch from an HDB Loan to a Bank Loan
For first-time buyers, there are many appeals of an HDB loan. Not only does it often require less cash upfront, some also believe HDB loans are ‘safer’. If, at the time of buying, you went for an HDB loan despite having the financial means to go with a bank loan, this might be your cue to switch to a bank loan via refinancing.
While the HDB loan provides a stable interest rate (currently 2.6%), it is much higher than what banks are offering - especially now. Switching out would mean taking advantage of interest rates as low as 1.2% which could significantly reduce your monthly repayments and overall interest costs!
Related article: HDB Loan vs Bank Loan: The Complete Guide to Financing your HDB
However, before you do so, do note that you cannot switch back to a HDB loan once you have opted for a bank mortgage. You should also take into account that bank loans only allow you to borrow up to 75% of your property value which might affect your cash flow situation in the short term. Depending on how much of your loan you have paid off, you may or may not need to put any extra cash ‘downpayment’ to refinance.
Overall, if you have the cash for it and the rates seem to be in your favour, refinancing can help you save a lot in interest payments if you can take advantage of the generally low rates that are expected to persist over the next few years.
Related article: How to Refinance from HDB Housing Loan to Bank Loan
2. You’ve Managed to Improve Your Credit Standing
If, previously, you struggled with a poor credit score and ended up with a less competitive home loan, there is light at the end of the tunnel. Say you have managed to pay off your other debts and clean up your finances, then this might be a good time to consider refinancing and take advantage of your improved credit score. You are much more likely to get a new mortgage offer with another bank at a lower interest rate, so you would be able to lock in a better deal for the next few years at least.
At the same time, though it might seem inconsequential, having paid off those debts also means a better Total Debt Servicing Ratio (TDSR) situation, and that can dramatically change the burden of your monthly repayments. The low interest rates banks are providing can also help alleviate it as well.
3. You Need to Free Up Cash Flow
Given the current recession and economic uncertainty, you may be finding yourself in need of more immediate cash in hand. If you have difficulty keeping up with your current monthly repayments, it might be favourable to take advantage of a lower interest rate and/or refinance for a longer loan tenure.
Related article: Why is it Important to Conserve Cash Flow?
Yes, extending your tenure through refinancing at this point may add to your long-term interest costs, but if your immediate priority is to ease cash flow, lowering your monthly repayments may be very helpful as an interim solution while you work on improving your financial situation. If, in the next few years, you manage to get things back to ‘normal’, you can consider refinancing again.
Do note that if your reason for needing to free up cash is a loss of income, then you may need to consider your TDSR when exploring refinancing. If your property is owner-occupied (i.e. it is your home and you live there), then there is TDSR exemption. However, if you are looking to refinance your mortgage for an investment property, then there is no waiver and the decline in your income may result in a failed TDSR.
Related article: What Happens to Your Mortgage If You Lose Your Job?
4. You are Looking to Buy a Second Property and Need to Readjust your TDSR
The TDSR can be a tricky thing and can affect your ability to invest in property in Singapore. If you are looking to purchase your second property and are already affected by the ABSD, refinancing your first property loan may come in handy.
A more manageable first mortgage loan can put you in a better financial situation to make investment decisions you would not otherwise make if you were stuck already with a large mortgage.
Related article: Can You Truly Afford a Second Property Investment in Singapore?
Need more guidance?
You might still be at a loss as to whether refinancing can help or harm you in the long run. If your situation does not fall within the five we have just mentioned, or even if it does, feel free to seek the advice of professionals such as our Home Finance Advisors at PropertyGuru Finance.
Often people land themselves in sticky situations needlessly because of a lack of research or poor timing. Things such as picking the right mortgage or the time to refinance are simple ways our advisors can assist you with making a big decision with the largest purchase you will probably make in your lifetime. Let them ease the burden while you sit back and enjoy the spoils of your labour.
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