Why home owners refinance?
Refinancing is the process of transferring your outstanding loan from Bank A to Bank B. After the refinance process, you need to service your monthly installment to Bank B instead of Bank A.
There are few reasons why clients refinance their home loan:
Lower interest rate = higher savings
Mr Alan 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 installment is $3592.36.
At that time, Bank B is having a promotional rate of 1.99% fixed for the 1st 3 years. Mr Alan 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 installment is now $2952.96. His monthly installment is reduced by $639.40 monthly.
If Mr Alan 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
Extend of home loan tenure
Some clients refinance because they want to extend their home loan tenure = decrease their monthly installment. This may be due to their new purchase of another property resulting on tight cash flow.
Mr Alan original loan tenure was 30 years. His monthly installment is $2952.96.
He could refinance and extend his loan up to 40 years (Formula to calculate is 75 years – younger applicant age = max loan tenure capped at 40 years). Therefore, his monthly installment is now $2418.40. His monthly installment was reduced by $534.56.
Reduce of home loan tenure
Since it is possible to extend the loan tenure, some clients refinance to reduce the loan tenure. The benefit of reducing the loan tenure is to reduce the total interest paid to the bank.
If Mr Alan package is 1.99% for the next 40 years on his $800k loan, total indicative interest paid to the bank for the next 40 years is $360,831.
If Mr Alan reduces his loan tenure to 30 years, total indicative interest paid to the bank for the next 30 years is $263,064.
Total difference is $97,767.
The shorter the loan tenure, the lesser the interest paid to the bank.
Changing of home loan type to better suit the needs
Some clients refinance to get a package that better suit their needs. This might be due to change of lifestyle. Example – from Sibor/Sor package (floating and unstable) to a fixed rate package (known interest rate and stable installment).