Common refinancing mistakes Singaporeans make
Refinancing: Taking out a new loan to pay off existing loans. A method to save money by taking advantage of lower interest rates or otherwise lower repayment amounts. It’s a solid method of ensuring you don’t spend too much on loans when you don’t have to.
Refinancing sounds boring, but it’s undoubtedly practical. And as with everything financial, you do need to keep a clear head before jumping in. What are the common mistakes that many people make when they try to refinance? One glaring one is that jumping ship and going for cheaper loans isn’t always worth it. Want to know why? Time to take notes. Get your notebook ready or pull out a word doc. Play it safe and take note of some of the most common pitfalls laid out clearly for you below.
1. Refinancing And Then Selling Before You Get To Enjoy Any Real Savings
Refinancing comes with its own expenses: there’s the conveyancing fee to think about, which can range from $2,000 to $3,000. Then there are other added costs that banks may decide to add on, like valuation fees. When you decide to sell, you’ll also want to cover the cost of actually refinancing while ensuring you still have a little extra to profit from. If you took out a $1,125,000 loan at two percent interest for 30 years, you’ll be paying $4,158 every month. Let’s say you decide to refinance into a package at a lower interest rate of 1.7 percent interest. Then you’ll be saving $167 per month at a fee of $3,991 a month. But be aware that you only really start saving after you take into account the refinancing fee. If your refinancing fee is $2.500, then you’ll still take about a year and three months before you make up the refinancing cost. Only then will you really see any real benefits. And if you decide to sell your house exactly two years later, you will only have saved about $1,500. The whole point of refinancing is to enjoy better savings. Before you sell, calculate your savings. Consider refinancing later if you won’t get much of it.
2. Refinancing Into An Apparently Cheaper Package
The Singapore Interbank Offered Rate (SIBOR) is an interest rate that is lower for the initial three years but then hikes up in the fourth year. Your first thought might be: It’s fine, I can always refinance when I hit that fourth year. But SIBOR rates tend to fluctuate and rise more quickly than Fixed Deposit Home Rate (FDHR), and you may find that instead of saving, you’re making a loss. An example: Your SIBOR loan has a 2.1 % interest rate in the fourth year and after, and you jump ship and refinance into a cheaper package at 1.7 % for the first three years. The fourth-year interest rate for the seemingly cheaper package is 2.3%, and you think you’ll refinance again, after the fourth year. So what do you do when the rates rise and all the other banks have initial rates higher than 2.3%? That’s more than your initial loan. You end up not saving but losing money. The moral of the story here is to be aware of shifting winds. Sometimes, it’s better to take a step back and see the whole picture, before you switch banks and refinance.
3. Not Checking the New Restrictions on Borrowing Before Refinancing
Financing today is very different from what it was back then. There are now way more restrictions on borrowing than ever before. In the 1990s or early 2000s, banks offered fewer restrictions on how much you can borrow from them for, say, house loans. So if you took out a loan 20 or 10 years ago and you want to refinance now, you should update yourself on the new restrictions in place. Check if you are actually eligible for a home loan, or if your loan tenure will be shortened. For the latter, note that your monthly repayments will increase. After your fact-finding mission, you may realize that refinancing isn’t worth the extra bother.
4. Using Loan Comparison Sites To Get The “Best Deal”
Finding information online is easy. But finding good and accurate information online isn’t. Just because some loan comparison site says that X bank has the best deal doesn’t necessarily mean it’s true. Loan rates fluctuate just like a hotel room or airplane ticket rates. And sometimes individual companies offer enticing discounts that may not necessarily be captured by those comparison sites. It may actually be the more expensive seeming loan that allows you to save more money. Plus, once the real discussion between broker and bank starts, rates can easily change from what is initially listed online. A mortgage broker can help you bargain for a better rate than originally advertised, so don’t be too hasty to bypass the broker to call the bank directly. You may not end up with the best possible rate if you do.
5. Refinancing When You Don’t Have The Money
As mentioned, refinancing costs money. If the requisite fee of $2,000 to $3,000 is more than you can afford, then don’t refinance at all. You may be able to pay using a credit card or some other loan, but what’s the point? You’ll essentially be getting a loan for another loan. Don’t do it unless you do intend to pay off the credit card loan in full to avoid paying interest. Even then, if you know there’s a less than 100% chance that will pay off the credit card loan, just forget about it. Save yourself the trouble and don’t refinance if you can’t afford the administrative costs.
Refinancing is a legitimate money-saving strategy, but it won’t always end up in a sure gain for your wallet. Bank rates fluctuate, restrictions are a dime a dozen, and you still have the initial refinancing cost to think about. So, be sure to calculate all your options and think long-term before you embark on the refinancing journey.
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