Is Refinancing Always a Good Idea? 5 Common Mistakes Singapore Homeowners Make
Refinancing can save you money — but only if you do it right. From ignoring lock-in periods to chasing the lowest rate blindly, here are 5 mistakes to avoid before switching your home loan.
LOOKING FOR MORTGAGE REFINANCING SERVICES?
You’ve probably heard it from friends, family, or seen it online: “You MUST refinance your home loan when your lock-in period ends!”
It’s often touted as a guaranteed way to save money. And for many people, it is. But is it always the smart move?
The simple truth is, no.
Refinancing your home loan can be a powerful financial tool, but it’s not a magic button that prints free money. For some homeowners, or in certain situations, it might not be worth the time and effort. It could even end up costing you more if you’re not careful.
So, before you jump on the refinancing bandwagon, it’s important to look before you leap. This guide will walk you through the 5 most common mistakes people make, helping you decide if refinancing is truly the right move for you.
Mistake #1: Ignoring the “Hidden” Costs
The biggest attraction of refinancing is the lower monthly payment. You see that you can save $150 a month, and you get excited. But it’s easy to forget that switching banks isn’t free.
There are two main costs you need to be aware of:
- Legal Fees: When you switch to a new bank, a law firm has to handle all the legal paperwork to transfer the mortgage. This typically costs between $1,500 and $2,000.
- Valuation Fees: The new bank will need to get an official valuation of your property to make sure it’s still worth the loan amount. This usually costs around $300 to $500.
So, you’re looking at a total cost of about $2,000 to $2,500.
Many banks offer subsidies to help cover these costs, which is great. But you need to do the math to see if you’ll actually save money in the end.
The “Break-Even” Calculation:
This is the most important calculation you can do. It’s very simple:
Total Costs / Monthly Savings = Months to Break Even
Let’s say your total cost after subsidies is $1,000, and your monthly savings are a modest $50.
$1,000 / $50 = 20 months.
It will take you 20 months just to break even and cover your costs. If your new lock-in period is only 24 months (2 years), you are only truly saving money for the last 4 months of the contract. Is all the paperwork and effort worth it for just 4 months of savings? Maybe not.
If your monthly savings are large (e.g., $200), then your break-even point is only 5 months, which makes refinancing a fantastic deal.
Mistake #2: Chasing the Lowest “Teaser” Rate
Banks are very good at marketing. They will often advertise a super-low “teaser” rate for the first year to catch your eye.
For example, a bank might offer a floating rate package like this:
- Year 1: 2.8%
- Year 2: 3.5%
- Year 3: 3.5%
You might see the 2.8% and think it’s the best deal. But another bank might be offering a simple 3-year fixed rate at 3.2%.
Which one is actually cheaper? You need to look at the average rate over the entire lock-in period.
- Bank A (Floating): (2.8 + 3.5 + 3.5) / 3 = 3.27% average
- Bank B (Fixed): 3.20% average
In this case, the slightly higher but stable fixed rate from Bank B is actually the cheaper option over the three years. Don’t be fooled by a low first-year rate. Always calculate the average to get the true picture.
Mistake #3: Confusing Repricing with Refinancing
This is a crucial choice that can save you a lot of hassle. You don’t always have to switch banks.
- Refinancing: Moving your home loan to a new bank.
- Repricing: Getting a new loan package from your existing bank.
When your lock-in period is about to end, you should always call your current bank first and ask what repricing packages they can offer you.
Why consider repricing?
- Minimal Fees: The best part about repricing is that the costs are very low. There are no legal fees. You usually just pay a small administrative fee, often around $200 to $800.
- Less Paperwork: The process is much faster and simpler because the bank already has all your information.
So when is repricing a good idea?
Repricing is a fantastic option if your current bank offers you a competitive rate that is very close to what other banks are offering.
For example, if another bank is offering you a rate that will save you $100 a month, but your current bank can offer you a repricing package that saves you $80 a month, it might be better to stick with your current bank. You save a little less each month, but you avoid the $2,000+ in fees and the hassle of a new application.
Mistake #4: Missing the Application Window
The refinancing process is not instant. It takes time. From application, to getting the offer, to the law firm doing its work, the whole process can take around 2 to 3 months.
A very common mistake is starting the process too late.
Imagine your lock-in period ends on 31st August. If you only start looking for a new bank in early August, there is no way the new loan will be ready in time.
What happens then?
On 1st September, your current bank will automatically switch you to their much higher floating rate (sometimes called the “board rate”). You could be stuck paying this high rate for one or two months while you wait for your new loan to be processed. That extra interest you pay could wipe out a chunk of your potential savings.
The Golden Rule: Start your research and comparison shopping at least 3 to 4 months before your lock-in period expires. This gives you plenty of time to find the best deal and complete the process without any stress.
Mistake #5: Assuming You’ll Be Approved Automatically
Just because you had a loan with your first bank doesn’t mean a new bank will automatically approve you.
Remember, refinancing is a brand-new loan application.
The new bank will look at your financial situation today, not from three years ago when you first bought your home. They will re-assess everything, including:
- Your current income: Has your salary changed? Have you recently switched to a freelance or contract role?
- Your other debts: Have you taken on a car loan or other personal loans since you bought your home?
- Your Total Debt Servicing Ratio (TDSR): The rules might have changed, or your debt situation might have changed. Your total monthly debt payments (including the new mortgage) cannot exceed 55% of your gross monthly income.
If your financial situation has become weaker, a new bank might not approve you for the full loan amount, or they might not approve you at all. It’s important to be realistic about your current financial health before you apply.
Conclusion: A Smart Decision is a Calculated One
The key takeaway is this: don’t just refinance because everyone else is doing it. A smart financial decision is always a calculated one.
Be objective. Do your own simple math. Understand all the costs involved, and weigh the pros and cons of simply repricing with your current bank versus refinancing with a new one.
Before you make the decision to switch, arm yourself with these three questions:
- What are the total fees I have to pay?
- What are my true monthly savings after I subtract the fees?
- How many months will it take for me to break even?
Answering these questions will tell you, without a doubt, if refinancing is truly worth it for you.