As a homeowner, you may have heard of the term “property refinancing”, but are you aware of exactly what it is? In Singapore, “property refinance” is used to refer to the process of switching out an existing home loan package to an entirely new one with another bank.
It’s usually done for various reasons—be it to take advantage of lower interest rates, manage cash flow better, switch to a shorter loan tenure without incurring penalties or to change a mortgage type from a fixed rate to a floating one. If it’s your first time trying to do a refinancing, here are certain things to take note of.
If you don’t know what this is yet, it’s time to do your homework. The Total Debt Servicing Ratio is a framework put in place to make sure that both people and financial institutions borrow and lend responsibly. It limits the sum of money borrowers can spend on debt repayments to 60% of their gross monthly income. This helps to ensure that loans are only issued to individuals who can afford to pay it back.
TDSR limits do not apply to mortgages where the owner is living in the house but applies to loans taken out on investment properties. If you’ve taken out any other form of loan or financing recently, you might have unintentionally pushed yourself over the TDSR threshold. The best way to improve your TDSR is to clear up any of your other debts. Do so a month or two ahead if you want it to show up on your credit report.
Just like any other loan, to property refinance in Singapore requires an acceptable credit score. If you want banks to be more willing to lend out money to you, you’ll have to take measures to repair and rebuild your creditworthiness.
Lock-in period prepayment penalty
Most home loan packages have a lock-in period of 2 to 3 years. If you choose to refinance when you’re more than 6 months away to the end of your lock-in period, you’ll have to pay up a hefty fee that amounts to around 1.5% of your outstanding loan amount. That doesn’t mean it’s necessary to wait until the lock-in period expires before starting the refinancing process—you just need to give your current bank at least 3 months notice.
Legal charges & valuation fees
Every time you take up a mortgage loan, there will inevitably be legal charges due to the amount of paperwork involved. The same goes with property refinancing, with costs ranging anywhere from $1,800 for an HDB flat to $3,000 for a private property.
Thankfully, banks do provide subsidies for legal charges incurred due to refinancing. As long as your loan amount goes over $300,000 for HBD or $500,000 for private property, the new bank you’ve chosen will subsidize around $1,800 and $2,000 respectively.
Keep in mind that you’ll also have to pay for valuation fees for the new bank to evaluate your property again. This can cost you between $250 to $1,000 or even more, depending on your property type and value.
Of course, there’s no such thing as a free lunch. Accepting a legal subsidy gives implicit consent to something known as a “clawback period”. Essentially, this is a temporary guarantee you’ve given to stay with the bank since they’ve helped to offset your legal charges. This means that if you try to refinance again within a 3-year long period, you’ll have to return the subsidized amount to the bank.