Refinancing Your Home Loan

Most people do not have enough cash on hand to pay the full purchase price of a house, and turn to mortgaging and taking out housing loans from banks. Many resign themselves to paying the loan back at the rates they signed up for decades ago. But did you know that you can still assess your loan options and take advantage of better prices? You may have previously learnt about financing your property purchase. Now, we will guide you through the process of refinancing your home loan.

When interest rates are low, it may be time for you to consider refinancing your home loan. This means taking out a new loan with a different bank at a different (and definitely better, if not there is no point in refinancing) interest rate or tenure. The cost of paying off your loan is significantly lower. You may also wish to unlock the value of your home by increasing the quantum of the loan when you refinance.

Below, we look at what you have to consider before refinancing, the general procedure, and the costs involved.

Process of Refinancing Your Housing Loan

You learn of a good loan offer and approach the bank to find out more. Once you decide to accept the bank’s offer and refinance your home loan, this is what happens:

1. Choose a law firm to complete the transaction. Usually, the bank you are refinancing with will recommend one or more from their panel of law firms.
2. Once you have chosen your law firm, they will write to your existing bank for them to appoint the same law firm to act for them in the transaction.
3. Upon your instructions, the law firm will then write to your existing bank to give them notice that you wish to redeem your loan.
4. Your existing bank will send your law firm a preliminary redemption statement, stating the preliminary calculation of the sum payable by you on the date of completion.
5. You make an appointment with your lawyers to sign the required documents. This includes the mortgage document.
6. If your new loan amount is lesser than the amount to be paid to your existing bank, your lawyers will advise you to leave enough money in your bank account held with your existing bank to cover the shortfall. Upon redemption of the loan, the existing bank can deduct the shortfall directly from the bank account which you have provided. Alternatively, prepare a cashier’s order for payment on that day.
7. On the day of completion, the final redemption statement will be sent by the bank.
8. Your lawyers will lodge the following transactions on your property:
   1. Total discharge of mortgage held by the existing bank
   2. New mortgage in favour of the new re-financing bank
9. Upon completion, your new bank will send you a notice on when your new monthly instalments will commence. You can then logon to your CPF account to set the amount to be used from your CPF to make payments.

Remember to continue paying the monthly instalments on the loan even after your lawyers have sent the notice to redeem. If not, you may be liable for late payment interests and penalties. Late interest and penalties payable cannot be paid for by drawing down on your new loan, and will have to be deducted from the funds in your bank account.

Things to Consider Before Refinancing

The most common reason for refinancing is to take advantage of lower interest rates and thus reduce the cost of borrowing. You should consider the following cost factors before proceeding with refinancing your home loan:

1. Lock-in period of your existing housing loan

Most housing loans will have a lock-in period of a few years. If you are redeeming your existing loan within the lock-in period, there may be additional costs/penalties to watch out for. This includes clawback of benefits which were given by the bank, such as rebates, cashback, cash rewards, or subsidy of legal fees. There may also be additional interest payable for redeeming your loan early.

2. Legal costs

As with all transactions involving your property, there are legal costs involved. Note that there are 3 parties involved here – the bank which your existing housing loan is with, the bank which you are refinancing with, and yourself. This means potentially 3 sets of legal costs if you do not choose your lawyers carefully.

However, as outlined above, the same law firm can act for all 3 parties, if the firm is on the panel of lawyers for both banks. This reduces your legal costs and makes your transaction more worthwhile.

Some banks also give legal subsidies if you refinance with them. The legal subsidy is usually up to 0.4% of your loan amount or $2,000, whichever is lower. Any legal cost exceeding that amount will have to be paid by you directly to the law firm.

3. Administrative fees

Certain banks may charge administrative fees, for eg, for valuation of your home. Do take note of them when considering a loan offer.

Use of CPF

In Singapore, many costs relating to your home can be paid for using CPF. This extends to refinancing as well. If you are required to pay any legal fees, this can be taken directly from your CPF. Monthly servicing of your new housing loan can also be from your CPF. Do note that administrative fees charged by the bank cannot be paid for using CPF as it is not considered part of your legal costs.

Choosing a Good Property Law Firm

As you can see, choosing a good property law firm to act for you is very important. It can lead to significant time and cost savings for you, and can determine whether the re-financing exercise is worthwhile. For more information, you may contact any one of our property lawyers.