The when and how of refinancing your home loan

Just like how trends come and go, home loan rates can increase or decrease depending on market conditions. 

A lot of factors come into play here in how these rates fluctuate. One example would be when central banks like the US Federal Reserve lower interest rates. Similarly, SIBOR-pegged rates (floating interest rate) that are tied to US Fed rates would trend downwards too.  

Therefore, if it’s within your best interest, you can choose to strategically refinance to a cheaper home loan package. When done right, this could potentially save you thousands of dollars. Let’s explore the ways in which you can jump on this opportunity.

What is home loan refinancing all about?

In a nutshell, to refinance your home loan is to switch from your current home loan to an entirely new one, usually from a different bank or financial institution. Alternatively, you’ll also be refinancing if you’re switching from an HDB concessionary housing loan to a bank loan.

When should you refinance?

#1: When you’re experiencing financial difficulties

This is one of the main reasons why people jump ship from their current mortgage. Whether it’s losing a job or getting a pay cut, it’s not easy to stick to our loan repayments when money is tight.

You can lighten the load of your liabilities by refinancing to another home loan package with a lower interest rate. You can even apply for the bank’s relief programme and extend your loan tenure, however it’s worth noting that doing so may result in higher accumulated interest costs. 

#2: When you can snag a lower interest rate 

It goes without saying that refinancing is usually a strategic move on the homeowner’s part to enjoy more savings and hopefully free up cashflow. This is achieved by getting a new home loan package with a lower interest rate and potentially lower monthly loan repayments as well.

To be on the super safe side, check with your financial adviser to determine if this is possible.

ALSO READ: 5 things to do when you can't pay your home loan

#3: When you need to take out a home equity loan

Home equity loan, also known as cash-out refinancing, comes in handy if you find yourself in debt or in urgent need of cash (and we mean lots of it). You can use your property as collateral to loan a substantial sum of money — think up to 75per cent of your property value — if the loan is approved.

Do note that this option is only possible for private properties.

#4: When you’re at the tail-end of your loan’s lock-in period 

Peek SingSaver’s home loan comparison page and you’ll notice that lock-in periods usually stretch two to three years. Once you’re in the clear, you’re free to switch to a new home loan without incurring any penalties. For the possibility of maximising savings alone, it’s definitely worth your while to take a look at the different home loan packages out there and the interest rates they offer. 

How can you refinance?

Step 1: Review your current home loan package

This is when you need to familiarise yourself with your existing home loan, by paying extra attention to your outstanding loan balance, loan tenure, and any fees and charges. It also wouldn’t hurt to read up on the terms and conditions. Most importantly, check your lock-in period and look out for any penalties you may incur.

Step 2: Compare home loan rates 

Visit comparison sites just like the one we have on SingSaver. It allows you to see all the different home loan packages offered by banks in one go. If you’re out of your lock-in period and you’re able to maximise savings, it could be in your best interest to refinance. 

Step 3: Calculate the necessary costs

Now that you’ve decided to refinance, the next best move is to calculate and prepare the upfront costs that come with the refinancing process. Legal and valuation fees are primarily what you would need to pay, although banks may be willing to offer subsidies. You would need cash on hand to pay those fees, as such do budget accordingly. 

ALSO READ: Why you should not be rushing to pay back your housing loan using your CPF savings

Step 4: Submit your loan application 

This is when the paperwork comes in as the bank would need to assess your financial background before they can approve your loan. You would need to provide a wide range of documents such as your CPF contribution history, payslips and valuation of your property, for starters. Once you’ve submitted the required documents, all that’s left to do is wait for the loan approval from your bank of choice.