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What is refinance?
Refinancing is the process of shifting your home loan from Bank A to Bank B for a lower interest rate. From this, homeowners get to enjoy savings on their home loan repayment due to lower interests.
Why does homeowners refinance their home loan?
Many homeowners refinance due to savings.
Example: If existing bank is offering an interest rate of 1.5% and Bank B is offering a promotional rate of 1%. Homeowners can switch to Bank B for a lower interest package.
Who should consider refinancing?
All homeowners should consider refinancing if their current home loan interest rate is not as competitive as the current market home loan rates.
Important clauses to look for when refinancing of home loan:
Lock in period
Look into your Letter of Offer (LO), the part that state lock in period. If you are under lock in, there will be a penalty if do a refinancing (usually the penalty is 1.5% of the outstanding loan amount). Thus, it is important to know when the lock in period is ending. Important thing to note – if the lock in period is 2 years, the 2 years lock in starts from the date of 1st disbursement of the home loan and not the date of the LO signed. This is a very common mistake assuming the 2 years lock in starts from the date of the LO which is not true.
Others important clauses include:
- Clawback
- Notice Period
- Repricing Date (for Sibor/SOR pegged home loan package only)
*More details below
What are the costs involved during refinancing of my home loan?
Existing loan
- Lock in period – depends on if contract still under lock in. If contract is still within lock in period, there may be a 1.5% penalty of outstanding home loan.
- Claw back – most contracts will have a 36 months claw back clause on legal fee, valuation and fire insurance, which total about $3000.
- Notice period – need to serve 3 months notice to existing bank when you are leaving them else there will be 3 months interest in lieu.
Documents needed for refinancing:
- Completed Mortgage Loan Application Form for all applicants
- Photocopy of NRIC or Passport (front and back) for all applicants
- Income Documents for all applicants:
- Salaried – Computerised pay slips (latest 3 months) or Latest 1 year Notice of Assessment / Self-Employed – Latest 2 year Notice of Assessment
- CPF property statement (if using CPF) – showing “Total principal amount used and accrued interest used”
- Outstanding mortgage loan statement from existing bank.
- HDB statement showing no HDB existing HDB loan
Case study: Wayne to refinance his home loan.
Wayne is paying 3.5% interest on his home loan of $800,000 with Bank A. The remaining loan tenure is 30 years and his monthly home loan installments is $3592.36.
At that time, Bank B is having a promotional rate of 1.99% fixed for the 1st 3 years. Wayne refinance his loan to bank B and maintain the loan tenure of 30 years. He will be paying an interest rate of 1.99% instead of 3.5%. His new monthly installments is now $2952.96. His monthly installments is reduced by $639.40 monthly.
If Wayne stayed with bank A, indicative interest paid for the next 3 years are $81,608.20.
After refinance his loan to bank B, indicative interest paid for the next 3 years are $46,028.56.
Total indicative savings for the next 3 years are $35,579.64.
Other reasons include:
- Change of home loan type to better suit the needs
- Reduce of home loan tenure to pay lesser interests
- Increase of home loan tenure for lower monthly installments