One of the most common questions we get from readers is “How much can I save from refinancing my HDB loan?” Of course, the home finance advisors from PropertyGuru Finance can most definitely work this out for you if you like, but if you’re hoping to do some independent research, this article will guide you on how to calculate your refinancing savings on your own.
To do that, let us turn this question into a problem sum:
Say Mr and Mrs Lim bought a $400,000 BTO HDB flat. Their CPF covered $50,000 at the point of sale, and they are paying for the remaining $350,000 with a 25-year HDB loan at 2.6%. They have been paying about $1,588 per month in instalments.
It has been five years. With 20 years left and after some partial repayments, they have $250,000 remaining on their HDB loan. They are considering refinancing to a bank mortgage with a 1.5% rate fixed for the next 5 years.
What are the steps they must take for refinancing?
How much can they save?
What other factors must they consider in calculating their savings?
Step 1: Deciding your Loan Amount
Mr and Mrs Lim are hoping to save on interest payments and reduce their monthly instalments by refinancing to a private bank.
Although they have 20 years left on their remaining tenure (five years have passed since they took the 25-year HDB loan), the Lims can actually extend their remaining tenure to 25 years as the maximum tenure for HDB refinancing is 30 years.
So, let’s say they decide to do just that, and refinance with a tenure of 25 years.
The first step Mr and Mrs Lim must take before refinancing is to decide on the loan quantum of their new loan. They can choose either to move the outstanding loan amount over to the new mortgage completely (i.e. ‘transfer’ everything over), or reduce the loan amount by making a lump sum prepayment prior to moving over to the new lender (i.e. pay off what they can, and bring the rest over). This decision will of course depend on their financial situation.
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Step 2: Calculating Fixed Rate Interest and Instalment Savings from Refinancing
Mr and Mrs Lim have decided not to make any prepayments, and to move the entire loan amount over when refinancing. What’s next?
Now, they must calculate what their new monthly instalments would be after refinancing and figure out whether the new mortgage package they’re eyeing is worth it.
For an easy way to calculate refinancing savings, let's use our Mortgage Calculator to look at how their annual payments (principal + interest) would pan out over the next few years.
If they continued with their HDB loan:
If they refinanced to the bank loan:
From the above, we can see that refinancing to a bank loan fixed at 1.5% would yield considerable savings over the fixed-rate period compared to a HDB loan.
Monthly repayments without refinancing
$1,134 per month (with HDB loan)
Monthly repayments after refinancing
$1,000 per month (with new bank loan)
Savings per month
Savings over five years
The Lims will pay $134 less per month, which is a savings of $8,040 over five years. In addition, they will also pay less interest monthly and overall, as more of the principal is being repaid each month in the bank mortgage compared to a HDB home loan.
Related article: HDB Loan vs Bank Loan: The Complete Guide to Financing your HDB
Step 3: Calculate Floating-Rate Interest Changes
At this point, it seems to make financial sense for the Lims to refinance. So let’s say they go ahead with it.
Even though they refinance to this lower interest rate package, remember, the fixed rate of 1.5% is only fixed for five years. After that, the interest rate reverts to a floating rate, and depending on the way the floating rate is calculated, it may change how much interest the Lims pay in the long run. If the interest rises high enough (because benchmark rates rise, for example), it may even eliminate any prior savings on interest.
This means that the Lims must also plan beyond the end of their new home loan.
For those who, unlike the Lims, want to refinance to a floating instead of a fixed rate package, this is an important consideration from the start.
Related article: Fixed vs Floating Rate Home Loans: How to Pick the Right One
To calculate your savings compared to HDB loans in that case, you will need to look at the current market conditions and estimate your interest savings based on the current interest rate and any projected future trends.
In practice, if the projected floating rate's range is still going to be considerably lower than HDB's 2.6%, or if you have saved enough from this round of refinancing to go for another one in five years and get another competitive package, this factor may have a lower weightage in your calculations.
The strong point of HDB loans is that they are considered stable in rates. Although pegged at +0.1% of the CPF OA rate (which means it can change if the CPF OA rate changes), the 2.6% interest rate has not changed in many years. Thus, many feel comfortable planning their finances around it.
However, in market conditions like the current low-interest rate environment, that 2.6% interest is also considerably higher than most mortgages being offered in the market today.
Step 4: Factor In Refinancing Costs and Subsidies
Is refinancing free? That depends.
Like everybody else, when Mr and Mrs Lim refinance their loans, they will incur refinancing costs such as valuation and conveyancing fees. These can come up to several thousand dollars and have to be ‘deducted’ from the potential savings.
Let's say that Mr and Mrs Lim’s refinancing costs come up to $3,000. After deducting this from the $8,040 in savings we calculated earlier, their ‘actual’ savings will be about $5,040.
It's still a significant sum, as the disparity between the HDB rate and the Lims' bank rate is great, but in situations where the difference in interest rates may be narrower, these refinancing costs can change the equation, or make "breaking even" take too long to be worth it.
Expenses like legal and valuation fees are non-negotiable and apply to everyone, but the reason why we said “it depends” earlier is because in many cases, banks offer subsidies to make refinancing more attractive to customers.
Assume that Mr and Mrs Lim's bank has offered them a $2,000 subsidy, so they only have to fork out $1,000 extra. In that case, their total savings for the five years would be $7,040, as long as they do not refinance within the clawback period for these subsidies.
Step 5: Factor in Potential Cash Outlay
In many cases, refinancing may come at a cost in cash as well.
If you BTO or buy a flat directly from HDB, HDB usually offers borrowers a maximum of 90% LTV (loan to value), and asks for a 10% downpayment, which can be paid entirely in CPF. In the Lims’ case, this means that their initial $50,000 CPF downpayment managed to cover slightly over 10% of the flat’s cost.
However, banks only offer a maximum of 75% LTV on their mortgages, and therefore ask for a minimum downpayment of 25% of a property's purchase price, of which 20% can be paid for from CPF, and at least 5% must be paid in cash.
If we take Mr and Mrs Lim’s flat as an example and assume that the property’s value is $400,000 to calculate the LTV, they would have paid off enough to fulfil the required ‘downpayment’, so they will not be required to top up further.
However, if you refinance your HDB loan early enough – say in the second year or sooner – that you have not yet paid off 25% of your property’s value, you may have to top up the difference in cash, and this needs to be considered as an additional cost, in terms of available liquidity for your cashflow.
Refinancing HDB Loan – Yea or Nay?
Mr and Mrs Lim's case study gives you a good example of how much you can save from refinancing your HDB loan. Here are some other homeowners who have also enjoyed refinancing savings:
However, interest savings are not the only consideration when calculating how much you can save from refinancing. As seen above, other factors and costs also play a role, and it's important that you take these into account for a more accurate picture.
The easiest way is to explore refinancing is to shop for the most competitive home loan packages on PropertGuru Finance, and use our Mortgage Calculator to work out the estimated payment schedule to decide if refinancing will be worth your while.
If you're still daunted by the numbers and unsure if you're getting your sums right, what you can do is get direct, personalised help from our experienced Home Finance Advisors. They'll help you do the sums, calculate personalised payment schedules, weigh costs and benefits, and even help you find and apply for the best mortgages for your current needs and situation.
Refinancing can give you great savings if done right – so make sure you do it right!
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