~ Refinancing is the most annoying thing every home buyer needs to know ~
Let’s face it: the biggest problem with property isn’t location, or the view, or the amenities. It’s that houses are crazy expensive in Singapore. Never mind a Sentosa Cove bungalow – there are shoebox apartments that would bankrupt a James Bond villain. That’s why every home buyer needs to understand the tedious miracle called refinancing:
What is refinancing?
Most of us need a property loan to buy a house in Singapore; and if you don’t, let me congratulate you on your string of successful bank robberies. For those of us who do need a loan, you may know by now that monthly repayments are variable*. Sometimes, interest rates climb to absurd heights, and your property asset threatens to become a liability.
This is where refinancing comes in: you can swap your existing property loan for a cheaper loan package. This means shifting your loan to another bank entirely (if you change loan packages but stay with the same bank, that’s called repricing, not refinancing.)
Note that there is no advantage to staying with the same bank when interest rates rise.
When should you refinance?
Home buyers often refinance under one of the following conditions:
- They are in the fourth or later year of their property loan
- Refinancing would save more money than it costs
- They are looking for fixed rates when interest rates rise
- They want to optimise profits from resale or rental of the property
- They are unhappy with the bank for non-financial reasons
1. They are in the fourth or later year of servicing their property
Most home loan packages have three years of teaser rates. From the fourth year onward, the interest rate will rise significantly. In fact, the mortgage broker at the bank will probably advise you to refinance on the fourth year.
Now older property buyers may tell you it’s not worth the hassle. Maybe back in 1985 that was true – in the pre-internet era I’d rather cut off my left foot than manually compare 50+ loan packages – but these days it’s easy.
Find an online mortgage broker, and they will summarise the cheapest loans for you. Many of them don’t even charge you for their services (they get referral fees from the bank.)
2. Refinancing would save more money than it costs
Refinancing requires legal paperwork. The fees for refinancing range from $2,000 to $3,000, because filling in template documents and stapling seven sheets of paper is really difficult to do.
But you need to look at how much you would save per month. Even a slight drop, like a 0.2 per cent fall in interest rates, can mean saving several hundred dollars a month (depending on the size of the outstanding loan.)
If the savings would more than cover the cost of refinancing within two to three years, it is worth refinancing.
3. They are looking for fixed rates when interest rates rise
When interest rates go up, home buyers start looking for fixed rate packages. This places a “cap” on the maximum monthly repayments. Hopefully, at the end of the fixed rate period, interest rates would have gone down again.
Alternatively, some home buyers hate the idea of fluctuating monthly repayments. They might try to maintain something called a semi-fixed rate: this is done by constantly refinancing between fixed rate packages. As such, their monthly repayment is always a predictable amount.
The people who do this tend to be the same ones who clip out and save grocery coupons, and drive their friends nuts by splitting restaurant bills to two decimal places.
If that’s your approach to personal finance, you’ll love a semi-fixed rate.
4. They want to optimise profits from resale or rental of the property
Property investors – particularly landlords – need to be finicky about refinancing. The more interest they pay on their property loan, the lower their capital gains when they resell.
Short term property investors, who often look to sell within five years, will refinance to ensure they pay the least possible amount for the property loan.
Landlords have to get rental income that will more than cover the monthly repayments. When interest rates rise, they have to either raise the rent (and hope tenants don’t storm off), or find a cheaper loan package.
Of course, refinancing is still secondary to factors like location, facilities, and interior design.
5. They are unhappy with the bank for non-financial reasons
Sometimes, refinancing happens because the bank is a mess. Maybe you get late payment notices even if you pay on time, or the repayment process has more steps than the Eiffel Tower.
The good news is you aren’t trapped with that particular bank. You can refinance with an institution that will make your life easier.