For years, Singaporeans have enjoyed cheap loans thanks to low Sibor (Singapore Interbank Offered Rate) rates. However, all good things do eventually, come to an end. The Sibor, to which most home loans in Singapore are pegged, has gone up since the Federal Reserve raised US interest rates towards the end of 2015. Before the rise, it was normal to pick the cheapest loan for three years and refinance on the fourth. But you can still save some money.
Refinancing is the transfer of your home loan from the original bank to another one. When you take on a home loan package, for the first three years, the 3 months SIBOR plus interest rates assume at 0.85 percent. In the fourth year, the interest rate is around 1.25 percent with a special loyalty bonus.
Refinancing means that you are switching your home loan package during the fourth year to help keep interest rates low. Refinancing is important in Singapore since bank loans have no permanent fixed rates.
Refinancing Vs. Repricing
While refinancing is switching a home loan to another bank, repricing is the same, but doing so to a package offered by your second bank. For example, if you switch from A’s home loan package to B’s home loan package, then that is refinancing. Switching from A’s home loan package Y to B’s home loan package Z is repricing. The major difference between the two options is the administrative and legal paperwork that might be cheaper, with some packages offering a few free repricing.
What is Different About Refinancing
Several factors are making refinancing different, including the changing property market and new cooling measures by the government. While the refinancing decisions you have to make are tougher, it does not mean that you cannot save some money. All you need to do is be on the lookout for:
1) The rising interest rates
The rise in interest rates is due to the bank’s spread (amount added to the 3-month SIBOR) going up. The recent slide of loan curbs is reducing the number of potential property buyers, which is a headache for banks that get their revenue from charging interest on home loans. In order to make up for the reduction of borrowers, banks raise the interest rate charged. In most cases, this accounts for the rise in rates.
As a homeowner looking to refinance, check the rate of the new home loan during the fourth year and afterwards. The rise of interest rates makes it prudent that you consider getting a good long-term home loan package with decent thereafter rates. Do not get too focused on the first three years and assume you can always refinance on the fourth.
2) Loan tenure restrictions
Under the new cooling measures implemented, 30 years is the maximum loan tenure for HDB flats and 35 for private properties. This is not stretchable through refinancing. Shorter loan tenures result in higher monthly repayments, leading to higher Total Debt Servicing Ratio (TDSR). This may make it hard for some borrowers to access refinancing.
3) Home loans TDSR framework
The most important thing you need to know is that when you refinance, you are subject to new TDSR framework unless your property is owner occupied. Refinancing will have you go through the credit checks process again. The Mortgage Servicing Ratio has to be 30 percent and lower with huge savings from your variable income among other factors. Of note is that the TDSR framework now takes into account credit cards and other unsecured credit facilities.
Therefore, since the loan restriction are tighter than ever before, you are likely to find yourself not qualified for a home loan. However, if your current rate is high, there is no harm in trying to refinance. If you are currently living in the property you wish to refinance, you do not have to worry. Otherwise, if it is an investment property, these changes will affect you.
4) Restricted legal subsidies
As you refinance your home loan, you will have to deal with legal costs. You need to trust someone to handle the proceedings, and these people are lawyers. A lawyer is likely to cost a few thousand Singapore dollars, while repricing is likely to run into the hundreds.
In the past, banks subsidised the legal fees. But changes in the Monetary Authority of Singapore (MAS) have seen banks withdraw this service. This means that as you refinance your home loan make sure that your monthly savings are not affected by legal fees you pay upfront.
As you read up on refinancing a home loan on sites like Property Guru, it is critical that you compare the rates every three or five years. You are likely to find something cheaper out there; there is no harm in trying to find out if you qualify for refinancing. In the meantime, avoid taking personal loans, car loans and other financial assistance tools if you want to refinance. Doing so is likely to drive up your TDSR over the 60 percent mark.