Should you refinance your mortgage? (Part 1)

Is refinancing the solution to your mortgage problems?

The economic slowdown brought by Covid-19 has devastated the global economy, with the unemployment rate at an all-time high and many being forced into poverty for the first time in their lives. Governments around the world who had seen a decline in Covid-19 cases have started to ease restrictions and lockdowns to revitalise their economy. Global bank interest rates have lowered drastically and many homeowners are left wondering should they refinance their mortgage during such critical time. So, should you refinance your mortgage now?

What does refinancing mortgage mean?

The process of refinancing a mortgage is basically choosing another loan from another bank to pay off your existing loan. This means you would compare the different banks and see the interest rates and the terms offered by them. You would then compare it to your current loan and see if it’s worth the switch.

In Singapore, the SIBOR (Singapore Interbank Offered Rate) is the rate at which banks pay to borrow from other banks. Why is this important? Well, it’s because the SIBOR is the key benchmark rate that many home loans are pegged to. In other words, whatever interest rate the banks are charged with, your interest rate for your home loan would follow suit. Now generally, there are two major reasons to refinance.

  • To reduce your monthly mortgage payment
  • To save on the overall interest you will pay on your house in the long run

Ideally, refinancing your mortgage will do both, but that doesn’t happen all too frequently. For example, if you have 15 years left on a 20-year mortgage and you have decided to refinance again for a 20-year term at a lower rate, you will get a lower monthly payment. But, you may end up paying more interest in the long run because now you will pay your home off over a total of 25 years. Meaning, you are paying “less” monthly but you actually pay more in the long run.

However, the opposite happens if, in a hypothetical situation, you have 30 years left on your loan and refinance with a 20-year mortgage. Your monthly payment may actually go up, but you may pay less in interest over the long run and you gain the additional benefit of having your house paid off 10 years sooner, which is good since you don’t need to worry about home mortgages. The whole refinancing process would take approximately 2 to 3 months or in some cases even up to 6 months. This is because, for leasehold properties with individual titles, the bank will have to apply for consent or approval from the authorities, not to mention all dreaded paperwork they have to go through.

Benefits and detriments of refinancing

The benefits:

1. Lower interest rate

According to a report by The Straits Times in May, the rates for new housing loans are between 1.4 and 1.8 per cent for the first year, lower than the range of 1.8 to 2.3 per cent last year. That’s a whopping 0.5% decrease in interest rates! So take advantage of where the market is now if it makes sense for your refinance goals.

This makes refinancing an attractive option as you can switch your home loan to another bank to enjoy a lower interest rate. For example, for a S$1 million loan taken over 20 years, a 0.5 per cent reduction in interest rates could mean a savings of about S$200 to S$240 per month. This adds up a lot in the short term and many borrowers need such short-term relief due to their current financial situation.

2. Pay off mortgage faster

If you are able to pay off your mortgage fully, you are relieved of a huge burden. For many people, this is wonderful because you have one less thing to worry about. Depending on the loan package you sign up for, you may end up paying less monthly or save the overall interest in the long run.

The detriments:

1. If you are planning to move soon

If you are planning on moving in the next few years, a refinance is probably not your best option for saving money. The fruit of refinancing is realised over many years, and if you are moving soon, you end up paying more than saving. It takes years of refinancing to be worth it so if you love moving houses every 5 years, then refinancing may not be for you.

2. Stretching it out

Although we have established that you could stretch out your loan and lower your monthly payments, you are still paying more in the long run and because of the way compounding interest works, it could cost you more over the long term - even if you reduce your mortgage rate in the process. It takes a lot of research and planning to decide whether you should choose shorter-term loans or long-term loans in order to save cost.

So, when should we refinance our mortgage?

Ask yourself this, how long would you stay in that house of yours? If you are planning to move out or sell it anytime soon, don’t even bother refinancing. Most refinancing takes several months or even years for it to begin to save you money.

Now if you face uncertainty, a loan officer can help you run scenarios that show you the most effective ways to save cost and potential savings from refinancing. Always bear this in mind: refinancing costs money, from application fees to attorney fees. So it’s safe to say you need to be in a fairly healthy financial situation in order to refinance. But just because you have the resources and will to do refinancing, it doesn’t necessarily mean you are qualified for the loan. Banks or loan officers will consider several factors before offering you the loan, these include:

  • Credit history and score
  • Income and employment history
  • Your equity in the home
  • Other debts you currently have
  • Home’s current value

Depending on these factors, you may acquire better terms and conditions from the bank that are more favourable to you or having a harder time getting a successful loan from the bank.

The good news is that there’s actually another option to refinancing and do stay tuned for part 2!  Speaking of other options, did you know there are actually a plethora of online money transactions platforms? In fact, TranSwap is one of them, offering safe and secure payments across 180+ countries at a very competitive rate! So if you’re interested, be sure to head over to our website, and lock in the good rates now!

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