Refinancing your home loan, which is supposed to be a money-saving method favoured by many homeowners, isn’t simply a matter of switching to another bank with lower rates and better terms.
In reality, a smart refinancing move requires proper prep and planning so that you can avoid mistakes that might cost you even more, and create a bigger headache for yourself. If you’re thinking of refinancing your home loan, here are some of the biggest mistakes that homeowners make, so that you can avoid them.
What is home refinancing?
But first, what is home refinancing?
Think of a home loan as a relationship with a financial institution. It’s costly and low-key confusing, and at some point, you might wonder if it’s time to break up and look for something better. In this context, a bank that offers lower interest rates, a better loan structure, and flexible incentives. That’s home refinancing in a nutshell.
When you ditch your current lender and refinance your home loan with another, your new bank will pay off your outstanding loan and lock you in with a new package. The goal of refinancing is to get lower monthly instalments, switch to a package with lower interest rate, change your loan repayment structure, and ideally reduce the total amount of interest that you’ll wind up paying.
1. Refinancing during the lock-in period or after interest rates increase
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Do yourself a favour and avoid the urge to refinance during your loan’s lock-in period. Most banks in Singapore charge a penalty fee of 1.5%-3% of the outstanding loan amount if you attempt to refinance too soon. If you do the math, this can easily amount to tens of thousands of dollars, if not more.
That being said, if you wait until it’s too late, interest rates might have gone up, taking with them any good deals that you might have had.
What to do instead: Review your loan contract and start to plot your refinancing options roughly three to six months before your lock-in period ends.
2. You forget additional costs like admin & legal fees
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While you’re planning to refinance your home loan, you may come across banks offering low first-year interest rates. It’s important that you don’t dive head-first into one of these. Instead, look at the overall loan structure and fees involved.
The cost of refinancing extends far beyond interest rates. Think: additional costs like admin charges, valuation costs, and legal fees. These can add up to a hefty sum that could send you into a tailspin of panic when you see them. Other items of note that you should not ignore include cashback and legal subsidies, which might be tied to higher interest rates later.
What to do instead: Compare the total cost of the loan over a period of two to three years. A package with slightly higher initial interest rates but lower fees could be cheaper in the long run.
3. You accept your bank’s repricing offer without comparing to others
Don’t settle for the convenience of repricing with your current bank before exhausting other options. While repricing is a straightforward route that saves you time and energy spent poring over different loan packages, it might end up more expensive than switching providers.
By refinancing with a different bank, you could potentially unlock perks for new customers, such as better rates and first-timer incentives. On top of that, if you go through a broker, you might even get access to broker-only deals such as lower floating SORA (Singapore Overnight Rate Average) spreads, higher cash rebates, and flexible lock-in terms.
For the uninitiated, SORA is a volume-weighted average rate of actual overnight borrowing transactions in Singapore, administered by the Monetary Authority of Singapore (MAS); SORA spreads are additional percentage margins added by banks to the base SORA rate for loans, covering lender risk and profit.
What to do instead: Use a mortgage broker for a better comparison of the refinancing options available to you.
4. You don’t get advice from a mortgage advisor
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Granted, you can DIY a lot of things like a Starbucks cold foam cold brew and spa facials at home. However, refinancing your home loan is not one of them. Home loan packages are full of fine print, mind boggling jargon, sneaky fees, and clauses you probably have never heard of in your life.
What to do instead: Seek advice from a mortgage advisor, who can hold your hand through the refinancing process. They’ll be able to help you to compare packages and break down terms you can comprehend.
5. You reset loan tenure to reduce monthly instalments
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News flash: you should not extend your loan tenure in order to reduce monthly instalments. Prolonging your loan by a few years is a trap that accrues your interest payable, which means you’ll be paying a much higher amount ultimately.
What to do instead: Extending your loan only if cash flow is tight. Otherwise, stick to your original tenure and make an aggressive saving plan to pay back within the time frame.
6. You pick a fixed loan package but plan to sell in a few years
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Fixed loan packages offer stability and certainty due to their fixed interest rate. However, if you’re planning to sell your property a few years down the road, having a fixed loan package may not be the best idea.
Here’s why: fixed loan packages usually come with a two to three year lock-in period. Selling within this period equates to early closure, which means you’ll need to pay the penalty fee.
Additionally, fixed-rate loans often start at a higher interest rate than their floating counterparts. If you’re selling within the first three years, or even shortly after the lock-in period, you may end up paying more interest over all.
What to do instead: Assess your long term plans and life goals before picking a loan package. Fixed rate packages suit those planning to hold onto their property for a longer period, while floating rate packages are more ideal for homeowners looking to sell, upgrade, or refinance before long.
Home refinancing mistakes homeowners make
While live and learn is a sound piece of wisdom, you definitely don’t want to learn the hard way when you’re refinancing your home loan, and risk making costly mistakes. Plan ahead, ask for advice from experts, and align your loans with your long term goals so you can avoid some of the biggest home refinancing mistakes that other homeowners have made.
For more home loan articles:
- HDB loan vs. bank loan: all you need to know
- How to use CPF to pay your HDB home loan
- What happens if you can’t repay your HDB home loan?
Cover image adapted from: TheSmartLocal
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