What’s the meaning of refinancing? It is to finance something, typically a home or car or big-ticket items, with another new loan, usually at lower interest rates in order for an individual to save money in the long run throughout the loan tenure.
Refinancing could be a great option and opportunity for borrowers who want to save thousands of dollars. With interest rates having risen dramatically in recent years, it may be a good time now to switch over to a new loan for its better terms and rates.
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Difference Between Refinancing And Repricing
But first of all, let us unpack the difference between refinancing and repricing. These two words sound nearly identical, but they are not exactly the same.
If you want to refinance your loan, you can switch to a loan from any other bank or licensed moneylender. However, for repricing, you can only switch to another loan from the same bank. This means that if you were to refinance your loan, you would be able to take your pick from any loan bundles in Singapore, enabling you to choose the loan with the lowest possible interest rate.
However, refinancing does come with higher costs and hassles as compared to repricing. Since repricing means that you choose another loan with different terms and rates from within the same bank, the speed of your application can be very fast, and some banks do allow their borrowers to reprice even during the loan’s lock-in period, with repricing fees as low as $500-$800, which could sometimes be waived.
On the other hand, refinancing would be slightly more cumbersome and costly as you may have to pay up to $2500 of refinancing costs and fees, potentially incur a penalty of 1.5% if you refinanced during your lock-in period, take a few months before eligibility criteria can be checked and paperwork have been taken into effect.
However, this doesn’t mean that refinancing is the worse of the two. Refinancing is suitable for those who do not mind performing their own research to pick out the best loan with the lowest interest rates, so that they can save a larger sum over their tenure. Accordingly, repricing would be more suited to those who prefer a seamless and frill-free process.
Related: The Basics of Refinancing Your Mortgage Loan
Can I Refinance Any Loan?
You may be wondering – can I refinance any loan that I have? For the most part, it is a yes. Most types of loans, especially home loans, car loans, and personal loans, which are also the more common loans that customers choose to take out and refinance, offer refinancing schemes.
Another method of refinancing to potentially enjoy lower interest rates and therefore savings would also be debt consolidation. A Debt Consolidation Plan (DCP) is a type of debt refinancing programme that consolidates all of a customer’s unsecured loans and credit cards across all banks with one bank, allowing the customer to make repayments on all his loans and credit facilities at once, usually at a lower overall interest rate.
However, it is important to note that the Debt Consolidation Plan (DCP) excludes refinancing options for renovation loans, education loan, medical loans, and some other credit facilities.
Related: Debt Consolidation – How A Personal Loan Can Help Save Money Paying Off Credit Card Debt
Why Refinance?
Refinancing has its perks and its cons, but the big question is, should you refinance my existing loan, or just stick to your current one? Below, we go through some of the reasons you should be considering for refinancing.
1. Lowered Interest Rates
You may have taken out your loan a long time ago, and the fixed rates on the loan have ended causing you to be at the mercy of the current high floating rates. Refinancing from floating to fixed rates, or vice versa is just one of the reasons that people may choose to refinance their loans now even though rates are higher than they were a few years ago.
If you expect rates to increase further in months to come, you may want to refinance to get a fixed rate loan now to lock in favourable rates. If rates have fallen since you originally financed your purchase, switching over to a lower rate loan will undoubtedly be in your favour, saving you a large sum in interest payments.
In general, refinancing could greatly help you to enjoy cheaper loans at lower rates, and enjoy savings in the long run.
Related: Should You Get a Fixed Home Loan or a Floating Home Loan?
2. Reducing Your Monthly Instalments
Unfortunately, it is possible that some refinance their loans not because they want to, but because they need to. In the event of a financial crisis or emergency, for example, a loss or reduction in your income, it is possible that you may not be able to afford your monthly instalments.
In such a scenario, you would need to find an alternative way to reduce your monthly instalments so that you can continue paying off your mortgage or loan without defaulting on your debt. If you are able to find another loan which offers lower and more affordable interest rates, that would be the best case scenario. However, if there are no other loans with lower rates, you may have to consider refinancing to another loan which has a longer tenure and repayment period. With a longer repayment timeline, the amounts you’d have to pay up each month would be reduced.
Since your tenure is extended, it is more likely that your total interest payments would be higher than before. However, it is one method for you to ensure that you are able to afford your monthly instalments. You are always able to refinance your loan again down the road when you have more space to pay larger monthly instalments at a more favourable rate to make up for this interest cost. Refinancing your loans is not just about saving you money but also giving you flexibility in your monthly expenses.
3. Pay Off Your Debt Quicker
When you successfully pay off a loan on a big ticket item, the feeling of accomplishment and peace of mind is like no other, since you’re no longer in debt.
Refinancing your loan to another with a shorter tenure could be one way for you to achieve this. Loans with shorter tenures tend to have lower total interest payments, which help you to enjoy great savings in the long run. However, it is also essential to understand that this translates into higher monthly instalments.
For borrowers who can afford it, shorter tenure loans are usually more cost-effective, making them prime choices for refinancing.
Related: Should You Pay Off Your Monthly Mortgage Early Or Invest?
Does Refinancing Help To Combat Rising Mortgage Rates?
In light of the current interest rate climate, many home loans have become very expensive. Is this a good time to refinance to combat these rising mortgage rates?
Home loans rates are starting to taper, but with inflation rates in the US proving to be sticker than previously thought, significantly lower interest rates might still be a ways away. Should you wait it out until interest rates decline? Or should you lock in fixed rates now in case these high rates are here to stay?
One strategy would be the “semi-fixed” strategy, where borrowers seek out fixed home loan packages in order to gain and ensure stability and security amidst all the market volatility and uncertainty. This helps borrowers who want to have more stabilised and predictable monthly instalments. Using this strategy, you can refinance from one fixed home loan to another fixed home loan, meaning that you would always get to enjoy predictable repayments and not have your monthly instalments be subject to a float rate, which could rise drastically at any time given the current economic climate of perpetually rising interest rates.
It is important to evaluate your existing home loan. If you are currently still in the lock-in period, or are already enjoying low interest rates, it would not be the best time to refinance. However, if you are on a float home loan package and would like more security in this volatile market environment, you may consider refinancing to a fixed home loan package now, before the rising interest rates climb even further.
Our Top Picks
To help you make a better decision, we have compiled all the current mortgage rates for those looking out to refinance their home loans in Singapore.
Best Fixed Mortgage Rates for HDB
| Bank | Monthly Instalment | 1st Yr Interest | Lock-in Period |
|---|---|---|---|
| HSBC | $ 2,268 | 3.000 | 2 years |
| HSBC | $ 2,281 | 3.000 | 2 years |
| MB | $ 2,294 | 3.300 | 2 years |
| MB | $ 2,307 | 3.400 | 3 years |
| OCBC | $ 2,307 | 3.000 | 3 years |
Best Floating Mortgage Rates for HDB
| Bank | Monthly Instalment | 1st Yr Interest | Lock-in Period |
|---|---|---|---|
| HSBC | $ 2,593 | 1.000 | 2 years |
| HSBC | $ 2,594 | 0.950 | 2 years |
| MB | $ 2,539 | 0.600 | 2 years |
| MB | $ 2,580 | 0.650 | 2 years |
| OCBC | $ 2,552 | 0.750 | 2 years |
Best Fixed Mortgage Rates for Private Homes
| Bank | Monthly Instalment | 1st Yr Interest | Lock-in Period |
|---|---|---|---|
| HSBC | $ 2,268 | 2.900 | 2 years |
| HSBC | $ 2,307 | 2.450 | 2 years |
| MB | $ 2,307 | 2.600 | 3 years |
| MB | $ 2,307 | 2.750 | 2 years |
| RHB | $ 2,319 | 2.750 | 2 years |
Best Floating Mortgage Rates for Private Homes
| Bank | Monthly Instalment | 1st Yr Interest | Lock-in Period |
|---|---|---|---|
| CITI | $ 2,674 | 0.550 | 1 year |
| HLF | $ 2,537 | 1.000 | 1 year |
| HSBC | $ 2,737 | 2.500 | 2 years |
| HSBC | $ 2,551 | 0.500 | 2 years |
| OCBC | $ 2,483 | 4.350 | 2 years |
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Conclusion
Refinancing can be one of the best ways to ensure that you save as much money as possible by going for a loan with a more favourable interest rate. Borrowers, especially for home loans, usually choose to refinance when the economic climate has substantial changes, causing interest rates to rise and fall quickly. All in all, refinancing has immense potential to help you enjoy great savings, whilst embarking on your financial opportunities.
Read More:
- Best Home Mortgage Loans in Singapore 2024
- Home Loan Basics: Total Debt Servicing Ratio (TDSR)
- How To Save Money When Buying A Resale Flat
- How to Achieve Freedom with Financial Planning in Singapore
- Benefits of Green Loans and How To Apply For Them
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