Should You Refinance Your Home Loans?

November 27, 2024

Refinancing is like giving your home loan a makeover. It means replacing your current loan with a new one, often with better terms. Refinancing might result in lower monthly payments, a reduced interest rate, or many other benefits. 

Why Do People Refinance?

There are various reasons why people refinance their home loans. Here are just some common reasons:

Lower monthly payments

One big reason to refinance is to obtain a lower interest rate. 

For example, if you originally got a mortgage at 4% interest and rates have now dropped to 3%, refinancing can reduce your monthly payments and the total interest you pay over time. 

Switch to fixed-rates

Maybe you have a floating rate where your interest rate changes with the market. This can make your payments unpredictable. By refinancing to a fixed-rate mortgage, you lock in a consistent payment amount. 

For instance, if your floating rate is currently at 3% but it fluctuates month to month. Refinancing to a fixed 3.5% might be worth the peace of mind.

Benefit from better credit scores

Perhaps, your credit score may have improved since you first took out the loan. If so, you could qualify for better terms on your loan. Refinancing lets you take advantage of your improved credit to get a lower interest rate, reducing your costs.

Find a better deal

You might have found another lender that offers more attractive rates or better terms. Imagine Bank A offers a 3.5% interest rate and Bank B offers 3.2%. Refinancing with Bank B can save quite a sum in the long run, especially on a 15-30-year house loan. 

Blind Spots To Look Out For When Refinancing 

Refinancing can be a savvy financial move, but it's crucial to be aware of potential blind spots.

Here are some things to consider: 

Take note of upfront expenses

Refinancing isn't free. There are upfront costs like valuation fees, administration fees and legal fees. These costs can sometimes eat into the savings from your new lower interest rate. 

For example, saving $200 a month but paying $5,000 in upfront costs will take 25 months just to break even.

Maximum Loan Tenure for HDB and Private Properties

In Singapore, the maximum loan tenure for HDB (Housing and Development Board) flats and private properties differ. For HDB loans, the maximum tenure is capped at 25 years, ensuring that homebuyers can manage their mortgage repayments within a reasonable period, promoting financial stability.¹

In contrast, private property loans offer more flexibility with a maximum tenure of up to 30 years.² This extended period allows buyers more time to repay their loans, making it easier to manage finances and afford higher-value properties.

Hidden fees to watch for

It’s important to check if your current loan has prepayment penalties. These are fees you pay for paying off your loan early, and they can affect your refinancing decision. 

If your current loan charges $2,000 for early payoff, this cost needs to be considered in your decision to refinance.

Credit checks 

In Singapore, refinancing involves a credit check. If your credit score has dropped since your original loan, you might not get the best refinancing terms. 

For instance, if you had a score of 1910 (AA) and now it's 1800 (EE), your new loan might come with higher rates than you hoped.

Watch out for interest rates 

Switching from a fixed-rate to a variable-rate loan means your interest rate could go up in the future, leading to higher monthly payments. If you refinance to a variable rate at 3% and rates rise to 4%, your payments will increase, potentially straining your budget.

Is Refinancing Right for You?

Deciding to refinance is a big decision. You need to weigh the potential costs and benefits carefully. It is important to consider factors such as current interest rates, loan terms, and financial goals. 

Consulting with a financial advisor can help you understand how refinancing might impact on your unique situation. For example, if you plan to stay in your home for a long time, the long-term savings from a lower interest rate might outweigh the closing costs. However, if you plan to move in a few years, the upfront costs might not be worth it. 

Remember that personal financial goals and circumstances vary, so it's important to consider your specific situation.

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References:

• 25-Year Loan Tenure For New Flats | Housing & Development Board
• Maximum Loan Tenure For Private Properties In Singapore | Loan Advisor

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_{The views expressed in this media do not necessarily reflect the views of PFPFA Pte Ltd (“PFPFA”). The information provided herein is intended for general circulation and not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use will be contrary to local laws or regulation. You should also note that the information presented does not have regard to the specific investment objectives, financial situation or the particular needs of any specific individuals; and therefore, may not be appropriate to your individual needs. You should seek the advice of your financial adviser representative or a professional before making any commitment to purchase or invest in any investment product.}