5 misconceptions that may be stopping you from refinancing your home loan

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Singapore is a nation that has a high homeownership rate of 87.9 per cent. This means almost every home in Singapore is proudly owned by a Singaporean.

But despite the high homeownership rate, there is still a knowledge gap when it comes to homeownership. Many homeowners like you don't know all your options when it comes to home loan refinancing, or worse, have misconceptions about refinancing your home loan.

We did a little research on our own and dug deeper into some of the most unthinkable reasons we have heard that led to homeowners not refinancing their home loan. In addition, we provide some pro tips on why these reasons for not refinancing don’t make sense for you as a homeowner.

1. You're afraid of "breaking things" when refinancing

There’s a saying that goes, “If it ain’t broke, don’t fix it”. Well, that’s the attitude that some homeowners adopt when it comes to home loans in Singapore. And this can be attributed to the fears that homeowners worry about when refinancing.

Here are some of the common worries that homeowners have to deal with and what we have to say about them:

Must I stick to the same loan amount and tenure if I were to refinance?

Refinancing is the act of switching your existing loan agreement from one bank's home loan package to another bank's. This means that you actually have the ability to restructure your loan as you see fit (within legal limits, of course!). So, for example, you have the option to increase the tenure of your loan (and thus pay less every month). You can even borrow more than your existing loan amount! This is known as cash-out refinancing, which we'll cover in another article.

Do I have to pay another "downpayment" when I refinance?

The only time when you may have to fork out additional funds as an additional downpayment is when you are switching from HDB loan to a bank loan . That’s because for new purchases, the loan-to-value (LTV) ratio for HDB loan is now 85 per cent whereas the LTV for bank loan is only 75 per cent.

However, there is no regulatory LTV limit on refinanced housing loans. banks and other financial institutions can grant up to the full amount outstanding, as long as you meet their credit assessment criteria.

What happens if I were to lose my job or get an pay cut after I refinance?

The loan quantum of the home loan is determined at the point of refinancing. Once you refinanced, any changes to your monthly income will not affect your home loan as long as you can still afford the monthly mortgage repayment.

Mortgage Master Pro tip: Refinancing is a golden opportunity for you to lower the interest rate on your home loan and get some tangible savings by reducing your monthly repayment amount. There is almost no risk to refinancing your home loan, so there’s no reason to miss out on those savings.

2. You didn’t know you are eligible to refinance your home loan

Did you know that you don’t have to stick to the same home loan package throughout your home ownership journey? And did you know that you can take the first step to refinance your home loan even before the lock-in period is over? Let us explain.

Every home loan package comes with a lock-in period. The lock-in period is a duration where you cannot switch out of your existing home loan. If you choose to switch out of your home loan package (i.e. refinance) while still in the lock-in period, you will need to pay a penalty.

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This works in a very similar manner to the contract for SIM plans with your current telco. If you try to switch to another telco while still under contract, you will be liable to pay termination fees.

The typical lock-in period for home loan is two to three years. Since there’s very little you can do during this lock-in period without incurring any penalty charges, it is not uncommon for homeowners to chuck the home loan to one side. Since two to three years is a long time, you might forget about it to the point that you don’t even know you are now eligible again to refinance to another home loan package.

Mortgage Master Pro tip: Take note of when your lock-in period ends, and set a reminder on your calendar for 18 months later (if the lock-in period is two years). That’s because you can start researching for a new home loan package to refinance to as early as 6 months before your lock-in period is up.

Alternatively, if you have engaged a mortgage broker like Mortgage Master, our mortgage specialist will help you keep track of the dates. When the time is right, our mortgage specialist will contact you to remind you to refinance.

3. You think refinancing is too much trouble

Home loan refinancing sounds sophisticated, complex and comes with lots of effort. Well, that’s what most homeowners who are unfamiliar with refinancing perceive about the process. In reality, the refinancing process is really much simpler.

If you are planning to do the refinancing yourself, all you need is five simple steps:

  1. Research to find the best home loan package from the banks
  2. Make your choice on which home loan package to choose
  3. Engage the bank and let them know that you plan to refinance and the home loan package that you want to refinance to
  4. Fill in the relevant bank forms
  5. Once your lock-in period is up, you can refinance to the new home loan package

Mortgage Master Pro tip: In fact, there is an even better way to refinance with all the heavy lifting done for you: Through a mortgage broker. A mortgage broker will help you to do steps one to five for you. They will advise you on the best home loan deals for your financial situation, and ensure that the proper documentation is obtained to ensure your refinancing journey is smooth and as uneventful as possible.

All you need to do is choose your preferred home loan package as advised by the mortgage broker, and be prepared to sign the new home loan package.

4. You worry about how much cash must be paid upfront when refinancing

A common concern among homeowners when it comes to refinancing is the having to fork out cash upfront when you refinance. For refinancing, there are a couple of fees that you will have to take into consideration.

a. Cancellation fees

If the loan quantum on your existing home loan has not been fully disbursed, you will have to pay a cancellation fee on the undisbursed amount. The cancellation fee is usually between 0.75 per cent and 1.5 per cent on the undisbursed amount.

Why you don’t have to fret about this: The cancellation fee is typically for new launch condos that have yet to (or just) obtain its Temporary Occupation Permit (TOP) where the final portion of the purchase price has yet to be disbursed by the bank. A good mortgage broker will advise you if it's worth incurring these cancellation fees when refinancing.

b. Legal fees

Every home loan package comes with its own set of paperwork such as conveyancing. These paperwork requires the bank’s legal team to look through them and thus they usually pass this legal fee on to you when you do a refinancing. The legal fee can be anywhere between $1,800 (HDB) to $3,000 (private property), depending on the bank and your property type.

Why you don’t have to fret about this: When you are doing a refinancing, it is common practice for banks to subsidise the legal fees, if your loan amount is above a certain amount. However, the caveat is there is a stipulated clawback period, and the bank will claw back the legal fees from you should you refinance during this period.

c. Valuation fees

To determine what’s the loan quantum that the bank can lend to you under the home loan, the bank needs to first determine the value of your property. This requires engaging a professional real estate valuer by the bank to value your property. As such, they charge a fee between $250 to $1,000 to value your property when you want to refinance your home loan.

Why you don’t have to fret about this: Similar to legal fees, it is also common for banks to subsidise the valuation fees. The same clawback clause will also apply if you decide to take up the subsidy.

ALSO READ: A guide to financing your first home

While there is a possibility that you might have to pay some cash upfront when you do a home loan refinance, chances are most of the fees either won’t apply to you or it will be fully subsidised by the bank. Thus, there’s not much for you to worry about, especially if your outstanding loan amount is high enough.

Mortgage Master Pro tip: If you are not sure which bank offers home loan package with fee subsidies, let Mortgage Master help you with that. Not only will we source for the best home loan package for you to refinance, we will also calculate which bank loan package will save you the most in the short term and long term.

5. You feel it's unwise to refinance at this point

Interest rates on home loan fluctuate from time to time, depending on the market condition. Thus, there’s always this fear of missing out (FOMO) for homeowners. What happens if you refinance and the interest rate goes even lower? Homeowners will then start to question whether now is the best time to refinance, or whether we should wait a bit more because the interest rate looks to be on the decline.

But the problem is that eventually the paradox of choice will hit homeowners and you end up not being able to make the decision to refinance.

From our many years of experience in the mortgage industry, the one thing we've learnt is that waiting for a lower rate to refinance almost always ends up costing the homeowner more in the long run.

Mortgage Master Pro tip: We started Mortgage Master to help and bring value to homeowners. One way we do that is to offer our professional advice on whether now is the right time to refinance or not.

First, we source for the best home loan with the lowest interest rate. Then, we compare your existing home loan with the new home loan package and present to you the potential savings you can get when you refinance. We also provide our professional opinion whether we think this is a good opportunity for you to refinance to save on your monthly mortgage repayment.

This article was first published in Mortgage Master.