At a glance...
Refinancing consists of replacing a current loan with a new one that pays off the debt of the first loan. This new loan should consist of better features that improve your finances.
Singaporeans tend to have a love-hate relationship ship with refinancing. While some love it, others don’t. If you are thinking of whether refinancing is a good idea, we have compiled a list of circumstances on when it may not be the best move.
If You Can’t Cover the Cost of Refinancing
As refinancing costs do not come free, or cheap, you will need to be prepared to fork out from $2,000 to $3,000 to a law firm just to settle paperwork. While you can try looking for a cheaper law firm, these law firms will also need to be approved by the bank. You will need to check which law firms are approved by your bank, as they typically have a limited group that they work with.
Besides this payment, you will also need to be qualified for refinancing and pay conveyancing fees again. You should also consider how long it may take to come up with a conveyancing cost, which may not be worth your time.
If it takes a year or more to recoup the conveyance cost, you should not refinance. While if your bank is willing to subsidise the legal fees, it may be more feasible to refinance.
Repricing May Be Cheaper
Repricing may be a better alternative when refinancing. While refinancing allows you a loan package from another bank, repricing allows you to merely switch to another loan package from your current bank.
Depending on your bank, you may also have a free repricing option. Do ask your bank if they offer this option. If they do not, the administration cost for repricing may still be lower than refinancing — from $200-$800. Repricing may also be quicker.
Your Loan Has a Lock-In Period
A lock-in clause will prevent you from refinancing for a specific time. If you have applied for a fixed rate loan, your lock-in period is for 5 years, by default. If you break your lock-in clause, there may be a penalty which you will need to fork out — which may not be worth it.
Look Out For Future Rates
Typically, the “fourth year onwards” rate on your current loan may be cheaper than on a new one. This means that while a new loan may appear cheaper for the first three years, it may be more expensive after that.
It is important that you think long term and look out for the future rates before surrendering a good fourth year and onwards rate.
UnderstandExotic Loan Options
There are other loans which you can take other than the usual SIBOR loan, such as a Swap Offer Rate (SOR) based loan, interest offset loans, or even loans by private banks.
These loans may have odd terms and conditions with odd interest rates. If you are unsure about these loan options, it is best that you avoid them.