4 Common Refinancing Mistakes

Posted on Posted in Refinance Your Home Loan
Are you contemplating whether to refinance your mortgage loan? It is wise to make informed choices for your mortgage to save as much as you can. Before you refinance, you should know that changing from one bank to another or repricing within the bank is subject to prevailing regulations on refinancing. One such regulation is the Total Debt Servicing Ratio (TDSR) framework which takes into account a borrower’s present and future commitments. You should calculate your TDSR and find out how much you can borrow before going down to the bank for a smoother transaction.
The whole point of refinancing is to save money by lowering your monthly payment or to respond to changing market rates due to a rising SIBOR (Singapore Interbank Offered Rate).  There are no loyalty rewards for staying with the same bank, if it is a good time to refinance, make sure to avoid the 5 mistakes commonly made.

Mistake #1: Not doing enough research

Many made the mistake of not doing their own proper research before refinancing. It is important to look around and compare current mortgage refinance rates across the different bank. A little makes a big difference especially in terms of the interest rates. A difference of 0.25 percent in interest rate per annum can save you tens of thousands of dollars over the course of the loan.  For example, with a loan of S$1,000,000 at a mortgage refinance rate of 1.5%, at a loan tenure of 30 years will result in a monthly payment of approximately S$3451. If you’re able to lock in a rate of 1.25% per annum for 30 years, your monthly payment drops to S$3,333. You will pay S$1,424 less per year and that is almost S$43,000 worth of savings throughout the whole duration of the loan.

Make sure you are aware of the current mortgage rates and find out the lowest mortgage rates other banks are offering. With the help of a refinance calculator, you can estimate your new monthly mortgage payment and find the lowest refinance mortgage rates in the market. Mortgage loans usually have a higher interest rate from the fourth year onwards, therefore, your monthly payment will increase if you do not refinance. Refinancing also helps you to avoid escalating market rates. For instance, switching to a fixed rate home loan might save you money in the long run if SIBOR is on the rise. Hence, doing your homework before refinancing will help you to save a lot more in the long run.

Mistake #2: Forgetting to consider all costs

There are many “hidden costs” such as closing cost that includes processing fees and legal fees etc. which will add up to at least a few thousand dollars if you refinance within the lock-in period. You need to weigh the pros and cons before you refinance with another lender.

Lowering your monthly payment by choosing the lowest refinance mortgage rates is a key goal of any refinance planning but it should not be the only factor you weigh. You should also consider the remaining tenure of your mortgage loan. If you’ve got 20 years left on your 30-year mortgage and refinance to a new 30-year mortgage, you can decrease the sum of your monthly repayments. Depending on your age, a person refinancing has a higher probability of not being able to get a 30-year loan. For example, at 35 years old, the first loan can be a 30-year tenure, when someone refinances at 40 years old, they can only get a 25-year loan. This may change the monthly repayment amount as compared to staying with the current loan.

Also, keep in mind that, depending on your new loan term, although the lower interest rate will reduce your monthly payments, you might end up paying more interest over the life of the loan compared to your current mortgage. If you are looking to hold the property and stay for a prolonged period of time, you can look into the option of obtaining a 15-year or 20-year mortgages instead of a 30-year one.

If your finance permits, a shorter loan term allows you to save some interest over the life of the mortgage. The extra interest payment for a long loan term is the “hidden cost” that many overlooks. Make sure to factor in the refinance closing cost and look at the cost with and without upfront points.

Conversely, it would be wise for investment properties to opt for a longer loan tenure, as the ability to hold on to the property for long periods of time would eventually break even with the rental income made.

When you are selecting your mortgage loans, you should not only be looking at the lowest refinance mortgage rates but also the other freebies and subsidies. A particular bank may be offering a “lower” rates for the first three years but you might end up paying more on legal fees, compared to the other banks that are charging higher interest rates but giving full legal subsidies. The subsidies help to cover the cost of refinancing your home loan and usually pertain to legal fees, valuation fees, and free fire insurance premium.

Be aware of what taking on a legal subsidy might cost you as it usually comes with a clawback clause. Clawback means that the bank can claim the subsidies back from you if you refinance within the lock-in period. This might mean that you might end up missing on a good loan package because it doesn’t make sense to refinance and incur the clawback.

To avoid this mistake and all the hassle that is associated with it, solidify your plans to refinance early as banks would usually require minimum notice period of 3 months so as to process your accounts.

Mistake #3: Refinancing during the “lock-in” period

While it is very tempting to switch to another bank because of the attractive loan package they offer, opting to do that might lead to a huge prepayment penalty when you decide to pay your loan ahead of the lock-in expiry. The prepayment penalty is usually around 1.5% of the outstanding sum and this allows the bank to recoup potential losses.

Thus, make sure you have taken into account the fees and calculated if it is worth it to refinance despite the high prepayment fees. Thus, it would be prudent to forecast your refinancing needs to avoid spending unnecessarily on the prepayment fees. To ensure seamless transfer between your old and new packages, we would advise refinancing 3 to 4 months before the expiry of the lock-in period as banks requires a minimum 3-month notice for a new refinance move.

Mistake #4: Refinancing with your current lender without “bargaining”

While it is convenient to simply refinance your current mortgage, you should not assume that your current lender will give you a special deal, unless the loan is larger than $1,000,000 and that would depend on the bank’s current financial position. Instead, always compare mortgage refinance rates with your current bank and check if their current mortgage refinances rates offer a lower interest rate than your current loan package.

Repricing is the process of changing to a different home loan package within the same bank. This usually happens when you spot a better interest rate, but it is coming from the same bank you are paying money to. Refinancing cost depends on the bank itself, there is usually an administrative charge or $500-$800 to reprice your loan.

When it comes to refinancing, a strategic approach is essential to ensuring the process goes as smoothly as possible. Knowing what you should and should not do can keep the costs down and the headaches to a minimum. It is important to check for the lowest refinance mortgage rates currently on the market. You can do this very easily and for free on sites such as HugMortgage to cut back on unnecessary money spent. With over 9 banks offering home loans, it is unlikely you won’t be able to find a better deal at some point. However, while it is essential to compare the current mortgage refinance rates, be sure to be wary of any hidden cost or attractive deals you are missing out.