April 20, 2008

Before you refinance your home loan...

The current downward trend in home loan rates provides a compelling reason for home owners to review their mortgage packages. Lorna Tan looks at five things to consider when refinancing your home loan

WITH interest rates in Singapore still falling and the property market turning quiet, banks are now gunning for the mortgage refinancing business.

Refinancing means replacing your current mortgage with another that comes with lower interest rates. This can be done with the same bank or by switching to another bank.

Many home owners are now considering this because the Singapore Inter-bank Offered Rate (Sibor) has fallen from over 3 per cent to below 1.3 per cent. Sibor, the rate at which banks lend to one another, is a key component used in setting home loan rates.

Some home owners have taken the bait. At HSBC Singapore, for example, refinancing applications have increased by more than 50 per cent in number over the past three months. Other banks, such as United Overseas Bank, have been circulating new refinancing packages by mail to home owners.

But before you take the plunge, you should be aware that refinancing a mortgage comes at a cost. Penalties could be imposed if you terminate your housing loan early with your existing lender, and you could incur legal fees if you refinance the loan with another bank.

Mr Dennis Ng, the founder of mortgage consultancy portal www.HousingLoanSG.com, reckons that if you are paying 3.5 per cent or higher on your home loan, you should be able to enjoy savings in interest by refinancing the loan.

He has worked out that, based on a 30-year loan tenure, refinancing an outstanding loan amount of $215,000 to a lower interest rate of 2.2 per cent, down from the current 4.5 per cent, would result in interest savings of about $14,730 over three years.

Balance your options

A mortgage with a lower interest rate might seem more attractive, but before you refinance your loan, consider these factors:

# Lock-in period

# Penalty for early loan redemption

# Conversion fee

# Legal subsidy

# Choice of fixed, variable or interest rate-linked rates

# Cash rebates

# Flexibility to make partial loan redemption

# Free fire insurance

# Affordability

Five things to note before you switch

1 When you should consider refinancing

Scenario 1

The savings outweigh the costs of refinancing. In other words, do your sums first.

Scenario 2

You do not plan to sell your property within the next 12 months.

Maybank Singapore's head of consumer banking, Ms Helen Neo, said it does not make sense to refinance if you plan to sell your home in the short term.

'Home owners have to pay redemption fees, and even refund legal subsidies or cashbacks to the banks,' she said.

Mr Dennis Ng, the founder of mortgage consultancy portal www.HousingLoanSG.com, added you typically need to give three months' notice to your existing bank before switching. If you sell your property within nine months, say, you will enjoy interest savings for only six months. Your savings might not be much higher than the refinancing costs.

2 What refinancing will cost you

With the same bank

# Within the lock-in period Check if your package has a lock-in period. During this time, usually two to three years, you have to pay a penalty if you withdraw your loan. It's usually 1-1.5 per cent of the outstanding loan amount.

Also, there is a conversion fee of $500 to $1,000.

# Outside the lock-in period The cost is just the conversion fee.

With another bank

With banks pulling out all the stops to garner a larger slice of the home loans market, it is worth your while to shop around. DBS Bank, for example, has customised packages that subsidise penalty payments, while Standard Chartered Bank (Stanchart) is repricing home loans down for existing customers on selected packages.

OCBC Bank's head of consumer secured lending, Mr Gregory Chan, encourages customers to talk to their lenders first before leaving for another bank. This is because the actual charges incurred could vary depending on various factors, which could include the time till the lock-in period expires and the customer's business relationship with the bank.

# Within the lock-in period

Besides having to cough up a penalty for early loan redemption, you will have to refund the subsidy on legal costs provided by your current bank.

Capped at $2,000, the subsidy is calculated based on 0.4 per cent of the loan amount, plus the cost of the $500 stamp duty. Most banks will offer a subsidy of up to $2,000, depending on the loan amount.

If your loan amount is, say, $500,000, the bank is likely to have given you a subsidy of $2,000.

# Outside the lock-in period

Normally, you don't need to pay your current bank penalties or administrative fees.

However, you might have to reimburse the bank for freebies you received when you first took out the loan. These could include legal subsidies, free fire insurance on the property and promotional shopping vouchers, said Citibank Singapore's business director, Mr Tan Chia Seng.

Whether you are inside or outside the lock-in period, refinancing a home loan with another bank means incurring legal fees again.

3 Which home loans benefit you most

There are more than 113 different home loan packages in the market.

# Fixed rates

Depending on your 'risk tolerance', you can consider locking in your loan at the current low interest rates for the next two to three years. This means going for fixed-rate loan packages in which the rates are fixed for the first two to three years.

# Pegged rates

If price transparency is a must and you believe interest rates are likely to remain low in the next 12 months, you can consider packages with rates pegged to the Singapore Inter-bank Offered Rate (Sibor) or other benchmark rates as you will automatically enjoy lower loan rates when interest rates fall further.

Said OCBC's Mr Chan: 'If fixed cash flow and protection against interest rate hikes are of utmost importance, our fixed-rate packages would be more appropriate.'

# Zero penalty for switching

Those who are thinking of selling their property in the next two to three years should choose a package with a shorter penalty period or one with no penalties attached. For a loan amount of $500,000, you would save $7,500 if you chose a package with no penalties attached over one that imposes a penalty charged at 1.5 per cent of the loan amount, said Mr Ng.

4 Which expenses you have to budget for

Rates don't stay depressed forever. When refinancing, do not underestimate other expenses in a lower interest rate environment only to find yourself unable to pay your debts and monthly instalments when rates rise later, said Mr Dennis Khoo, the general manager of wealth management at Stanchart.

Borrowers should ensure they are not over-exposed to debt repayments. Set aside enough cash to cover at least six to 12 months of all necessary expenses such as utilities and phone bills, he said.

5 Which packages offer favourable incentives

There are more than rates to consider when refinancing.

# Partial loan repayment

Pick a package that does not penalise you for partial repayments. This means you can lower your overall loan balance whenever you wish to redeem part of your loan.

# Free loan conversion

If your property is still under construction, ask for a package with a 'free loan conversion'. This lets you switch to a package with lower rates when you get your temporary occupation permit.

# Rebates

If a package offers a cash rebate, check if it is refundable and if there will be any additional penalty charges should you withdraw within the lock-in period.

# Free fire insurance

Some lenders throw this in.

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