In this guide, we'll cover:
What is refinancing?
How does refinancing work?
Do you need to pay to refinance?
Is it good or bad to refinance your home loan?
How to refinance your home loan
What is Refinancing?
Putting it simply, to refinance is to replace your existing property loan with a new one. This is usually done when the new housing loan offers more favourable terms. For example, you may refinance your HDB housing loan (e.g. 2.6%) to a bank loan which offers a lower interest rate (e.g. 1.5%). You may also choose to move from one bank to another bank once your lock-in period is over and your existing plan's interest rate goes up.
How Does Refinancing Work?
How refinancing works is that when your application for a refinance property loan with Bank B is approved, Bank B will proceed to pay off your existing mortgage with Bank A, and bring over the prior loan balance.
Say, in 2017 you took a property loan with Bank A at 1.8% (3-year fixed rate). Now that the three years is over, the rates have gone up to over 2%. At this point, you still owe Bank A $300,000.
Thinking that this is too expensive to service the rest of your debt, you decide to shop around and found that Bank B is offering interest rates of 1.5% (3-year fixed rate). Hence, you decide to apply to refinance to Bank B.
If your refinancing application is approved, Bank B will pay Bank A the $300,000 that you owe. You will no longer owe Bank A any money; instead, you will owe Bank B $300,000 under the terms of the new loan. The loan is essentially 'transferred' to Bank B.
Thinking of refinancing? Compare home loan rates now.
Do You Need to Pay to Refinance?
Yes, there are certain costs involved with refinancing your home loan. The two main fees are 1) legal fees and 2) valuation fee. Added up, these can cost from $2,000 to $3,000+. However, many times, banks will offer to subsidize these costs to incentivise homeowners to refinance.
For example, if you're refinancing from Bank A to Bank B, Bank B may offer you a $2,000 subsidy to help lower the costs. Subsidies often come with a clawback clause though, which stipulate that you can't refinance again for a few years (unless you pay back the subsidy).
Depending on the terms of your existing home loan, there may also be other costs like prepayment penalties and/or cancellation fees. To be sure, it is best to check with your current bank whether these charges will apply should you decide to refinance.
So... Given the costs involved, should you still consider refinancing?
Is it Good or Bad to Refinance your Home Loan?
This is a tricky question as it largely depends on your unique situation, but generally, you can calculate your potential savings to help you decide if you should refinance. Factor in both your costs of refinancing and how much you can expect to save in monthly repayments.
Related article: Does Refinancing Always Save You Money?
As illustrated above, there are many instances when refinancing your loan can result in significant savings. Generally, those with HDB loans consider refinancing after a few years when they've paid off at least 25% of their property's price (because most people can only borrow up to 75% from banks). Those with bank loans typically explore refinancing once their lock-in periods are over (so they can switch to another bank without having to pay any penalties).
If you need personalised recommendations on whether it's worth it for you to refinance your home loan, check out PropertyGuru Finance. Our expert home finance advisors are happy to help (with no strings attached!).
How to refinance your home loan
'Refinancing' sounds complicated, but it's actually a very straightforward process - especially with PropertyGuru Finance ready to do the heavy lifting for you. Here are the steps to refinancing:
Check that it is a good time for you to refinance your home loan.
Reach out to PropertyGuru Finance for recommendations.
You may also compare interest rates on your own if you wish.
Decide on your preferred home loan.
If you'll let us, we will help you with the refinancing application from hereon!
All you'll need to do is prepare the necessary documents (see our refinancing checklist here).
Disclaimer: Information provided on this website is general in nature and does not constitute financial advice.
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