What to note on refinancing your mortgage loan

1. What is mortgage refinancing?
Mortgage refinancing is defined as the action of switching your current mortgage loan from your existing bank to a new bank. Your reasons to refinance mortgage can be:
i) To pay a lower monthly instalment amount with a lower interest rate package.
ii) To unlock equity for additional liquidity to grow investment portfolio or for other purposes.

2. Why should you refinance your mortgage loan?
If you are paying an interest rate that is higher than what the current market is offering at the moment, maybe it is time for you to consider and explore the option to refinance to a lower mortgage interest rate package. The lower mortgage interest rate may allow you to pay a lower monthly instalment amount assuming your loan tenure remains unchanged.

Furthermore, if you own a private property in Singapore, you may also be able take cash out of the property (sometimes it’s referred to unlocking of equity) if your property price has appreciated over time or if you have paid down your loan outstanding over time. This cash out loan will be at mortgage interest rates, which tend to be much lower than unsecured loans like cards, personal loans and other credit lines.

3. What should you look out for when deciding if you should refinance your mortgage loan?
Prior to checking out the refinancing options, it is always advisable to check with your existing bank (i.e. the bank that you are currently servicing your loan with) if you are out of the lock-in period or near to the lock-in expiry of your existing home loan package.

In addition, you should also check if your existing home loan package is still within any reimbursement period (if there is any in your current mortgage contract). In the event that your existing home loan package is out of the lock-in period, but within the reimbursement period, you may need to reimburse the bank on any rebates and subsidies (such as legal fees and valuation fees), that were previously provided to you by the bank when you have first taken up your home loan. The reimbursement period is independent of the lock-in period and may sometimes extend beyond the lock-in period. For example, a no lock-in package may have a 3-year reimbursement period.

However, despite all these potential fees that may be applicable, refinancing can still be a wise move in certain situations, for example in a declining rate environment when the interest savings will be very substantial (more than the fees you will pay) or if your current interest rates have climbed up to the higher levels after the initial period of 2 – 3 years.

4. What are the types of Mortgage Loan Packages in the market?
Types of mortgage loan packages are:

i) Fixed Rate Package
where interest rate(s) are fixed within the contractual period(s) as agreed by the bank and borrower(s). Floating interest rates will kick in after the fixed rate period ends.

ii) SIBOR-pegged Variable Rate Package (sometimes known as Floating rates)
where the mortgage pricing is more transparent and the effective interest rate is derived from Singapore Interbank Offer Rate (SIBOR) plus a spread rate (as defined in the mortgage contract).

iii) Board Rate Variable Package
where the mortgage pricing is based on the board rate as determined by the bank and the effective interest rate is derived from board rate with a discount rate (as defined in the mortgage contract).

iv) Fixed Deposit Variable Package
where the mortgage pricing is based on the average fixed deposit rate as determined by the bank plus a spread rate (as defined in the mortgage contract).

5. What are the details to note prior to taking up any mortgage refinancing option?

i) If your current Mortgage Package is a SIBOR linked or other index linked package
If you have taken up a SIBOR linked package for your home loan, you would have to take note of SIBOR reset date or interest expiry date whenever you would like to do any partial or full redemption on their home loan amount This SIBOR reset date is based on the duration of the SIBOR tenure used for your home loan. For example, a 1-month SIBOR package will have its SIBOR reset or expiry date at the end of each monthly SIBOR duration or cycle. Some banks may impose a breakage fee on loan redemptions made on any other dates other than the respective SIBOR reset or expiry date. Hence, it is important to time the redemption of the mortgage loan on those reset or expiry date.

ii) Notice Period Requirement
No matter which type of mortgage packages you have taken up for your home loan, you would have to observe the requirement of giving your existing bank (i.e. existing bank that you have taken the current home loan with) a 3-month written notice. If insufficient full redemption written notice is provided to the existing bank, you would have to pay the interest in-lieu for the shortfall of the notice period served. Always start the process of reviewing your current mortgage loan package earlier and / or comparing various packages offered by other banks so that you would have ample time to serve the written notice prior to refinancing completion. Internal refinancing within existing bank may require a shorter notice period and it is subject to individual bank’s terms and conditions.

6. What are the types of fees that you may incur

All fees vary and are subject to individual bank’s terms and conditions. These are just some common examples of fees to look out for. As mentioned earlier, depending on the interest rate environment and the terms of your current package, it may still be logical to refinance your home loan now despite the fees, providing the interest savings outweigh these fees.

a) Cancellation fees
You may incur cancellation fees if you were to cancel any undisbursed loan amount.

b) Prepayment fees
You may incur prepayment fees if you were to refinance or redeem your home loan within the lock-in period.

c) Reimbursement fees
If you have received any subsidy (legal or valuation) or rebate from your existing bank at the time of taking up the loan, you may need to reimburse partial/full amount of subsidy or rebate that you have received from your existing bank if you are still within the Reimbursement period, which is defined in your mortgage contract with the bank.

d) Legal fees
For refinancing to another bank, you will be incurring legal fees where it is advisable and cheaper to engage the same lawyer/legal firm to handle your full redemption (including serving a full redemption notice to existing bank) and mortgage documents to refinance with another bank.

e) Valuation fees
Valuation fees are payable because the bank (which you will be switching to) will need to engage a valuation firm to re-value your residential property prior granting any loan approval to proceed with the refinancing process.

f) Conversion fees
You may incur conversion fees that are chargeable by your existing bank if you would like to do an internal refinancing.

7. Summary
It is advisable to review your mortgage interest rate periodically as you may be able to save a substantial interest amount. While reviewing your existing home loan package and selecting your new package, do take note of the nature of the benchmark / index or base rate that is used to derive the effective interest rates of the home loan. This is because different benchmarks or indexes come with different levels of transparency and volatility, which may negate any interest savings that you may be hoping to enjoy. Do also factor in all the possible fees that you may incur during the whole refinancing process so as to calculate the actual interest savings that you can get to enjoy for carrying out the refinancing decision.

Finally, if you are still in doubt, do speak with a Citibank mortgage specialist to find out the intricacies of each package so that you can refinance with confidence.

 

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