Housing loan interest rates have been steadily increasing since the beginning of 2015 and many home owners would like to refinance at fixed or stable rates while the rates are still relatively low.
However, before signing on the dotted line, home owners need to consider whether their net savings from refinancing balance out in their favour, even though the new rates may look very attractive.
There are 3 important sets of costs to consider, before realizing the actual savings from refinancing.
- Penalty to pay back to current bank: make sure that you will be out of the penalty period (ie lock-in period) in the coming 3- 6 months, otherwise your current bank will charge a hefty 1.5% of outstanding loan amount. Why 3-6 months? Your current bank needs minimum 3 months’ written notice in advance for the refinancing whilst the new bank normally waits for up to 6 months for you to come over. If the penalty will expire in more than 6 months’ time, it is advisable to wait until the 6 months period before the penalty expiry date.
- Claw-back to pay back to current bank: Banks normally pay for some third party professional fees for refinancing applications in order to make a deal sweeter. The third party professional costs generally refer to legal fee, valuation fee and fire insurance premiums. Sometimes there are also cash rebates provided by the banks. When a bank pays for any of the fees, there will be a reimbursement period of 3 years of the full amount if the loan is fully redeemed within the first 3 years’ time for the bank to recover their costs. What will be considered as “full redemption”? These are generally 3 scenarios: selling of a property, refinancing with another bank, and owners fully pay up the loan using cash and/or CPF.
- Third party professional fees to pay for the new refinanced loan after bank’s subsidies. As the bank’s subsidies are tagged to the new loan amount, it is possible that a home owner will need to top-up the professional fees if the bank’s subsidies are insufficient based on the loan to be undertaken.
In a nutshell, a home owner needs to do a total balance of all the upfront costs and consider them together with the gross interest savings.
Formula: Net refinancing savings = Interest savings for 3-5 years – penalty – clawback to current bank – top-ups of 3rd party professional fees
When you consider the above formula you will be assured that you have made the right move.