It has been 3 years since the purchase of my first property in Singapore. At the point of purchase, the loan that I signed up for had a 3 year lock-in period. Now that the lock-in period is up, I am looking at ways to reduce my interest expenses.
To do so, I have decided to refinance my existing loan. At the time of writing, I am still in the midst of restructuring the loan.
It is now a good time for me to examine the process. I hope to share what I have done right and what I could have done better.
#1 Benefits of refinancing
Interest rates for most bank loans will increase sharply after the lock in period. By refinancing with a new loan, you will end up with lower interest rates and hence reduce your interest expense.
In my case, the existing rates are as follows:
- First year: 1.2% fixed rate
- Second year: 1.4% fixed rate
- Third year: 1.5% fixed rate
- After third year: Estimated 2.5%
By refinancing into a new loan, I will be subjected to a new interest rate of 1.28% instead of 2.5%. In the first year alone, I will be saving $3,972.51 in interest! The full benefit of refinancing is as shown below:
#2 Cost of refinancing
The benefits of refinancing far outweighs the cost.
Based on my personal experience, you will need to pay these fees to refinance your loan:
- Valuation fee: $150 + 7% GST
- Legal fee: $1500
In addition, the bank which I will be taking up a new loan from will subsidise up to 0.4% of my loan amount to cover the legal fee component. In my case this works out to be $1380.
Effectively, I will only need to pay $180 for the legal fees.
#3 Timeline
Although the entire process is not difficult, refinancing a loan will take some time. The duration depends on how fast you can provide the required information to the bank and the processing time from the bank.
You will also need to provide notice of redemption to your existing bank. The norm for this notice is at least 3 months. To avoid paying higher interest, the refinancing exercise should start at least 3 months before the end of your lock in period.
My suggestion is to start sourcing for a new loan at least 6 months before the end of the lock in period.
#4 Procedures
If you are still not sure how you should kickstart your refinancing journey, here’s what I did for mine:
- Find the best loan package in the market.
- Submit your home loan refinancing application
- Transfer your existing loan through a lawyer
I elaborate more below.
a) Find the best loan package in the market.
Here are some common platforms for comparing housing loans:
At your end, there is no cost involved. The loan broker will receive their referral fee from the bank. This is one of the best ways to source for the most competitive loan package.
In doing so, the loan broker will provide advice on whether it is worthwhile to refinance your loan. They will also be the one to provide guidance on the refinancing application.
Also, with the new government cooling measure, it is good to check with a loan broker or your banker if you could refinance your loan. For example, if you have other debt(s) to service, or if your income has changed, you may not able to get the same loan amount as what you had previously.
b) Submit your home loan refinancing application
Once you have decided on the loan package, the loan broker will help to submit the application. Upon approval from the bank, the loan broker will also make arrangements to meet up with the banker to go through the loan application.
c) Transfer your existing loan through a lawyer
You should also be able to ask for a lawyer referral from your loan broker. There will be a separate appointment with your lawyer to sign the transfer of the existing loan to new loan.
#5 Home Protection Scheme (Mortgage Insurance)
The Home Protection Scheme (HPS) is a mortgage insurance that pays off your outstanding loan in the event of death, terminal illness or total permanent disability (TPD).
You should also take note of these 4 features about the HPS:
- It is mandatory to have HPS if you are using your CPF savings to pay for your monthly housing loan instalment on your HDB flat.
- You can utilise your CPF for the insurance premium.
- HPS does not apply if you own a private property.
- You will need to apply for a HPS when you refinance your loan:
When I did my refinancing, I realised that we had to switch our existing HPS. This is because from the CPF board’s perspective, we are terminating our existing loan and reapplying for a new loan. Hence, their stand is that we need to terminate our existing HPS and reapply for a new HPS.
In normal circumstances, it is a simple enough procedure that should not cause for alarm. However in the new application, we were told to declare our existing medical conditions. If my wife or I had developed a medical condition from the time of the previous loan application to the current one, we might have difficulty applying for a new HPS. This could derail our refinancing plans.
On the other hand, if we were to use mortgage insurance from a private insurer, there is no need to terminate our existing policy when we refinance our loan. The coverage will continue and all medical conditions will be fully taken care of. The downside is that I have to use cash to pay the premium for private mortgage insurance.
Below is the comparison of HPS vs private mortgage insurance for a 32 year old male non-smoker with a 330k outstanding loan for 22 years:
| Home Protection Scheme | Private Mortgage Insurance | |
|---|---|---|
| Premium Per Year | $291.39 | $264.00 |
| Premium Term | 19 years | 20 years |
| Source of Premium Payment | CPF or Cash | Cash only |
| Need for renewal of policy upon refinancing | Yes | No |
Conclusion
In most cases, refinancing a loan at the end of the lock in period will reduce your interest expense. It is not difficult to do so.
You only need to initiate contact with the loan broker and submit the relevant documents. They will then take care of everything else. I urge all readers to give serious considerations on refinancing. Do not end up paying more interest than what you really need to.
Do drop me an email at louis@drwealth.com or contact me at 81015331 if you need advice on your personal finance matters.