Taking on a home loan is probably one of the biggest financial commitment in our lives – one that we spends years paying for. Hence, it is important to understand how refinancing our home loan can help us get the best of the situation and lighten our load.
What is Refinancing?
Refinancing is the process of switching your existing home loan package to a new one with another bank. Refinancing is a common practice in Singapore and people often do it to take advantage of:
- Lower interest rates
- A shorter loan tenure
- The option to change their mortgage type (eg: from a fixed rate to a floating rate)
Why Refinance?
In Singapore, most home loan packages are structured similarly. The interest rates for the first 3 years are significantly low followed by a substantial increase from the 4th year onwards. Since there are no loyalty rewards for sticking with the same bank, it makes financial sense for property owners to switch to another loan package with better interest rates every few years.
Over time, getting a lower interest rate can result in significant savings. Not only can you save a huge amount of money, refinancing can lead to lower monthly repayments as compared to your existing monthly mortgage payment.This will improve your cash flow, leaving you with more discretionary income for other expenses.
Pro Tips for Refinancing
#1 Keep a look out for a better offer
The home loans market is ever-changing, with banks offering different interest rates every month. While your loan package may have been the best one several years ago, it is unlikely to be that way now.
Using an online home loan calculator can help to compare all the available home loan package quickly, without having to toggle through the websites of all the different banks. Hassle-free and at zero cost!
#2 Monitor the lock-in period
If you refinance your home loan after the lock-in period expires, you would still have to bear higher repayments for a minimum of the next three months due to the notice period requirement. If you monitor your lock-in period, you would be able to apply for refinancing earlier.
The best time to refinance is to do it four to seven months ahead of the lock-in expiry.
#3 Improve your TDSR
The Total Debt Servicing Ratio (TDSR) is a framework to ensure that people borrow and banks lend responsibly. The TDSR limits the amount borrowers can spend on debt repayments to 60% of their gross monthly income. It was introduced to ensure loans are only issued to individuals who can actually afford them.
Improve your TDSR by clearing up some of your other debts. It’s advisable to do so a month or two ahead so that it shows on your credit report.
Still unclear if you should refinance? Book a free consultation with us at +65 9845 9978 today!