Suppose you wanted to secure a lower interest rate on your existing mortgage, or access better repayment terms, such as a shorter loan term or lower monthly payments, one of the best ways to do so is to refinance your mortgage. However, mortgage refinancing is easier said than done, especially for those unfamiliar with the process. If this is your first time doing a mortgage refinancing, this guide will help you navigate the process with greater confidence and clarity.
To put it simply, mortgage refinancing is the process by which a borrower switches from an existing home loan to another more favourable one under a different bank.
There are a number of reasons why borrowers consider refinancing , the first being, as previously mentioned, to secure a lower interest rate in hopes of saving on interest payments. Another reason is to cash out a portion of the home's equity (the value of the home in your control vs that which is controlled by the lender via the mortgage) for purposes such as renovations, or paying off existing debts.
Besides securing lower rates and accessing a portion of the home's value in cash, mortgage refinancing is also a viable means for accessing better repayment terms. With the definition out of the way, let’s dive into the process.
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Before refinancing a mortgage, we recommend thoroughly evaluating your current mortgage terms to know if you are eligible. For example, most, if not all, mortgages come with a lock-in period, which, essentially, is a period of time during which a borrower is bound by contract not to refinance a loan or pay it in full without incurring a penalty. This stipulation was designed to discourage borrowers from refinancing or paying their loan early, which could impact a lender's profitability.
Similarly, subsidy clawbacks (perks that need to be repaid if you refinance) and interest rate adjustment dates (scheduled times when the interest rate on your mortgage can change) are mechanisms that borrowers should check before refinancing as they may affect the cost and feasibility of refinancing.
With the mortgage terms and other conditions associated with refinancing taken into account, the next step of the process is to determine your financial goals. If you are still unsure, you should check in with your mortgage broker who can help evaluate if now is the right time to do a refinancing. For financials goals, the typical reason for refinancing is to save cost. However, there may be reasons such as to lengthen your loan tenor to reduce your monthly repayment. It could also be to shorten the loan tenor to pay back your mortgage quicker. Other reasons for refinancing could also be to get additional cash through a second mortgage. Once you establish these reasons, you can start your loan search.
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Since the refinancing process can take up to 6 months to complete, it is advisable to start researching and gathering quotes around 6 months before your lock-in or clawback period ends, or before higher interest rates take effect in the fourth year of your mortgage. This provides ample time to compare different packages, serve the necessary notice (typically 3 months) to your current bank, and address any credit score issues.
When considering your options, you need to decide on the type of mortgage that suits you best. Fixed Rate mortgages offer the most stability, allowing you to lock in rates for up to 5 years before they are subject to review by the bank. Floating Rate mortgages, on the other hand, are based on the Singapore Overnight Rate Average (SORA), which is the interest rate banks in Singapore use when lending to one another. SORA has replaced the more volatile Singapore Dollar Swap Offered Rate (SOR), which was affected by US Dollar fluctuations. Floating rates can change at different intervals, such as every 1, 3, 6, or even 12 months, depending on the package.
Board Rate mortgages have interest rates set by the bank, which can be changed at the bank’s discretion, usually with 30 days' notice. Although these rates often appear attractive, they lack the price transparency of SORA-pegged packages. Fixed Deposit-pegged packages are linked to the bank's current fixed deposit rates, typically in denominations of 18, 36, or 48 months. While these packages offer more transparency than Board Rate packages, they are still controlled by the bank.
As you search for the most suitable loan package, remember to inquire about any signing bonuses, such as subsidies for legal and valuation fees or waivers for administrative costs. Consult a mortgage broker like Lendingpot who will be able to give you the latest rate packages across multiple banks.
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The home loan application process typically starts with an online application via Singpass with your bank. To complete this application, you need to submit your last 3 months' payslips, a bonus letter if applicable, and the NRICs of all borrowers. If you need assistance, a broker can arrange for a banker to guide you through the process.
Once your application is approved, the banker will issue a letter of offer, which may be digital, and you can accept it electronically. This letter will outline all the new terms of your loan. It is important to have the banker review the key terms with you, as it is their responsibility to ensure you understand them fully.
Upon approval, you can check with the banker for a lawyer to help you with your legal process. Once appointed, you may instruct the law firm to notify your current bank of your intention to redeem your loan. Your bank will then provide a preliminary redemption statement, outlining the estimated amount payable on the completion date. You will need to schedule an appointment with your lawyers to sign the necessary documents, including the mortgage document. If your new loan amount is less than the amount owed to your current bank, your lawyers will advise you to ensure sufficient funds in your account to cover the shortfall.
Upon loan redemption, the bank can directly deduct the shortfall from your provided account, or you can prepare a cashier’s order for payment on that day. On the completion date, the final redemption statement will be issued by the bank. Your lawyers will then process the discharge of the existing mortgage and establish a new mortgage with the refinancing bank. After completion, your new bank will inform you of the start date for your new monthly instalments, and you can log in to your CPF account to set the payment amount to be deducted from your CPF.
There you go, your mortgage refinance is complete.
By first taking into account the terms under your existing mortgage, researching and comparing various refinancing packages as well as consulting mortgage specialists, you can make a more informed decision that not only aligns with your financial goals but ensures that you’ve secured the best possible terms for your refinancing.
Apply today with Lendingpot, and let us help you make your financial aspirations a reality.
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