Why 2020 is a good time to refinance your home loan and what to look out for

2020 has been a challenging year for most people with the Covid-19 global pandemic causing an economic slowdown for most countries, including Singapore. However, if there is one silver lining, it is that interest rates are much lower.

Due to quantitative easing as governments worldwide push for economic stimulus, the world is entering a period of low interest rates.

The US Federal Reserve (Fed) has slashed the Fed fund rate to 0 per cent to 0.25 per cent in March and is likely to continue to hold interest rates at close to zero to the end of 2022. This has implications as the Singapore Interbank Offered Rate (SIBOR) and the US Fed rates have been historically correlated.

In Singapore, SIBOR is the rate at which banks pay to borrow from other banks. It is also the key benchmark rate that many home loans are pegged to. Following the global trend of lower interest rates, the SIBOR has reached its lowest point in recent years.

As of 5 June 2020 , one-month SIBOR rate is around 0.25 per cent while the three-month SIBOR rate is at 0.56 per cent.

Improve your cash flow with lower home loan interest rates

This lowering of interest rates is good news for people with existing home loans, as banks in Singapore have been reducing the interest rates for home loans.

According to a recent report by the Straits Times, the current rates for new housing loans are between 1.4 per cent and 1.8 per cent for the first year, lower than the range of 1.8 per cent to 2.3 per cent last year.

This makes refinancing an attractive option as you can switch your home loan to another bank to enjoy a lower interest rate. For example, for a $1 million loan taken over 20 years, a 0.5 per cent reduction in interest rates could mean a savings of about $200 to $240 per month.

These savings would be significant, especially during this uncertain economic period.

Switching from HDB loan to bank loan

Switching from your HDB loan to a bank loan during this period may also make sense. For example, if you have an outstanding loan of $300,000 and a 20-year tenure, your monthly repayment would be $1,604 per month based on the HDB loan rate of 2.6 per cent.

If you switch your mortgage from an HDB loan to a bank loan and enjoy an interest rate of 1.5 per cent, monthly repayments will be $1,448 per month, or about $156 less each month.

If you are currently on a home loan of 2.0 per cent, you will pay about $1,518 per month. Refinancing it to 1.5 per cent will reduce your monthly payment to $1,448, giving you a savings of about $70 each month.

However, before you jump into refinancing your home loan, there are 3 things to watch out for: 1) timing and lock-in periods, 2) possible penalties of your existing loan and 3) associated costs with refinancing.

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#1 Timing & lock-In periods

The best time to start looking for a refinance is about 4 to 6 months before the end of the lock-in period of your existing mortgage.

This is because most bank loans will require you to serve a 3 to 6 months’ notice before you can redeem the loan.

By starting 4 to 6 months before the end of the lock-in period, you can ensure a smooth transition from your existing loan rates to the refinanced new loan rates.

This will allow for enough time to serve the letter of notice to your existing bank and for the new bank to process your refinancing application.

Your mortgage broker will be able to advise you on this.

#2 Possible penalties of your existing home loan

For bank loans, refinancing during the lock-in period will incur a penalty (typically 1 per cent of outstanding loan amount), which will negate any cost-savings. Another possible penalty is a clawback of any legal fee subsidies granted during loan application.

An alternative to refinancing is repricing. Repricing is when you stay with the same bank but change to a new loan package they offer you. While the rates for repricing are usually not as attractive as those for refinancing since you are limited to only one bank, the benefit is that you save on costs.

Instead of legal fees, you only pay for an administrative charge (from $200 to $800) and the processing and paperwork are much simpler. Typically, the repricing applications take about one month to process, much shorter than the usual three months for refinancing.

#3 Costs associated with refinancing

Similar to getting a home loan for the first time, refinancing has its associated fees. You will need to pay for conveyancing fees (around $2000 to $3000) and depending on the bank, you may incur valuation fees (around $700 to $1000).

However, these fees may be subsidised or even fully absorbed by the bank that you are refinancing with. Shop for the best deal as many banks offer legal fee subsidies as part of their refinancing package.

Another point to consider is your plans for your property. If you intend to sell within the next few years, watch out for any penalties associated with sale of property in your new loan package, especially during the lock-in period.

Caveats for HDB loan holders

If you are planning to switch from an HDB loan to a bank loan, it is important to note that once you switch to a bank loan, you cannot switch back to HDB loan for the same property.

Instead of paying a fixed amount for the lifetime of your HDB loan, you will need to manage your bank loan by refinancing or repricing in the future.

In addition to the costs associated with refinancing, there are also other considerations before switching from an HDB loan to a bank loan.

HDB allows you to borrow up to 90 per cent of your property value but banks can only allow you to borrow up to 75 per cent of your property value.

If your loan eligibility has changed or if you have not accumulated enough home equity, taking a bank loan may worsen your cash flow situation.

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Additionally, bank loans typically would charge an early prepayment penalty while there is no penalty for HDB loans. Thus, people who want to pay off their loans early will have to reconsider or look for loan packages that allow for partial early repayments.

While the current environment of lower interest rates makes refinancing an attractive option, it is important to evaluate the cost savings and your current and future plans before committing to a new loan.