A home is easily one of the biggest-ticket purchases for any Singaporean, and is also considered one of the most significant – albeit most expensive – milestones on the road to adulting. And unless you’ve inherited millions of dollars or won the lottery, you might have resorted to getting a HDB loan or bank loan to pay for your home.
You could probably still recall your excitement when you first placed your down payment or the huge sense of relief when your home loan was approved. But once the initial excitement wears off after a few years, you may be thinking of ways to clear off your debt quickly and affordably. Many homeowners would choose to do refinancing – replacing an existing debt obligation, say, a HDB loan with a bank loan offering lower interest rates.
There are many considerations when it comes to refinancing such as whether to pick fixed or floating rates, or when is the best time to start. Today we’ll attempt to give you the lowdown on how to go about refinancing your home and potentially save you some money!
Note: This article will focus on HDB bank loans instead of HDB loans with a fixed interest rate of 2.6%.
Fixed interest rates and floating interest rates
Every homeowner’s goal is to pay as little interest as possible over the period of holding the loan, so it’s important to be on the lookout for the lowest rates. Let’s kick off Home Loan Refinancing 101 by introducing the two types of interest structure rates in the market – fixed rates and floating rates.
For fixed rates, buyers lock in a certain interest rate for a lock-in period – a period for which investments cannot be sold or redeemed, upon which penalties are incurred if you break it. Regardless of how the market rates fluctuate, your interest rates will remain the same until this lock-in period ends, after which “floating” rates come into play.
On the other hand, floating rates float up and down depending on a reference rate pegged to local or international market indicators, such as the Singapore Interbank Offered Rate (SIBOR), Singapore Swap Offer Rate (SOR), or Secured Overnight Financing Rate (SOFR).
Image credit: Trading Economics
View the rates for SIBOR, SOR, and SOFR.
When to choose fixed or floating rates
Choosing fixed or floating rates comes down to how well you understand the economy. Think of refinancing like a guessing game which requires you to understand and predict the patterns of economic growth. No, you don’t need to be a pro, but you should at least have an understanding of how the rates may behave in the next two to four years – typically the years of a lock-in period or the amount of time you are tied to a loan. Generally:
If you think interest rates will rise, stick to a fixed rate.
Fixed rates are typically higher as banks charge a premium for loans with set rates, so consider it as you’re paying extra for better peace of mind! Fixed rates may also appeal to those who identify as risk averse and prefer budgeting with certainty over the initial years of the housing loan.
If you think interest rates will drop or remain stagnant, consider a floating rate.
Interest rates have risen quite a fair bit over the past 12 months in light of a bullish resale market coupled with a record-breaking number of million-dollar HDB flats sold in 2022. That being said, there’s no telling what the market will look like even with expert analysts forecasting interest rates at a high of 5%. For context, interest rates were 0.1949% at the start of 2022.
If you don’t mind risking it for the biscuit and expect interest rates to trend downwards, then a floating rate might be more of interest to you instead. Keep in mind that floating rates will result in greater volatility since your monthly repayments may fluctuate accordingly.
Best Fixed Rates for HDB Bank Loan
Best Floating Rates for HDB Bank Loan
Apart from fixed and floating rates, there are also 2 more components to mortgages to know: refinancing and repricing.
Repricing vs Refinancing
Some homeowners choose to make the switch from an HDB loan to a bank loan, or from one bank to another to enjoy lower rates. This is known as refinancing. Say your interest rates were originally 2.5% upon your first home loan sign-up in 2017, and 4 years later your lock-in period ends, and there are other banks offering lower interest rates such as 1.5%. By switching, you’d be able to pay less interest and mortgage repayments over time.
Fees and penalties for Refinancing and Repricing
Warning: Refinancing or repricing might not be worth it for those who have yet to complete their lock-in period. Timing is key when it comes to saving money on your home loan, and breaking your contract will result in heartache, especially after being slapped with a bunch of fees and penalties!
While refinancing is originally meant to minimise expense, the penalty costs may outweigh potential savings and you may end up losing more money trying to game the system. The list below reflects the fees associated with breaking your lock-in period, but before you give up on wanting to refinance altogether, check if your bank provides any subsidies for these fees!
Fees involved with home loan refinancing
Note: The following fees are applicable upon breaking the lock-in period
In this case, repricing seems to be the more economical alternative which only charges repricing fees ranging from S$200-S$800, instead of legal and valuation fees. Even better, paperwork for repricing is much simpler since you can skip the whole credit assessment exercise, and the process usually takes around one month to complete.
Even if you choose to refinance after the lock-in period is over, your new bank will need to access your background, request for payslips, and conduct a property valuation – a tedious procedure which takes up to three months. If convenience is high on your priority list, we recommend opting for home loan repricing instead.
Timing and lock-in
For those considering refinancing, the best time to refinance is typically four to six months before your lock-in period ends. This timeframe will allow you to lock in a good rate ASAP, especially if you’re unsure if interest rates will continue to increase.
From the day you give your current bank notice to the time they complete the processing, your lock-in period would ideally have ended, and you won’t be wasting any time transitioning to the new bank.
When to go for Refinancing or Repricing
Before you jump into refinancing, take a step back to see if it’s in line with the goals you want to achieve. Refinancing your home loan may reduce your monthly instalments and total cost of borrowing, and with lower interest rates you’ll have more disposable income to channel into your savings, CPF, or even that post-pandemic vacation.
If your top priority is to save money and you don’t see yourself moving into a new place any time soon, refinancing can be a smart way to save some money.
Refinancing can also be something you consider when your financial situation has changed. If you’ve just gotten a raise, you may want to clear off your loan faster with lower interest rates and similar monthly instalments. On the flip side, those whose finances are currently tight may want to lengthen the tenure and ease cash flow, though we should point out that doing so may lead to an increase in the overall payable loan amount.
Repricing your home loan would make more sense if you expect the switching costs to burn a big hole in your pocket, especially during the lock-in period. The heavy penalties and fees may negate any potential cost savings, making repricing a better decision if the cost of refinancing exceeds the amount you hope to save.
Home loan refinancing in Singapore
Paying off your home loan is the ultimate target, but the decisions you make today will determine how soon you pay off your mortgage or how much money you will save. While there are many ways to save big bucks on your housing loans, there is no textbook answer on which is the right one to choose. The golden rule is to do proper research and reassess your goals before making the dive – do your home loan refinancing properly and you’ll be one step closer to achieving financial freedom.
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Originally published on 16th September 2021. Last updated by Josiah Neo on 3rd January 2023.
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