Refinancing is the swapping of your existing home loan package with a new one with a different bank – mainly to take advantage of lower interest rates. It is usually done from the 4th year onwards as most banks raise their interest rates after the 3rd year. This would be the best time to see if another bank can offer you a better rate.
How much can you save when you switch to a different bank to finance your mortgage?
The new home loan package with an interest rate of 1.5% will help save your about $156 a month and about $5,616 after 3 years. No doubt, this is a simplified illustration. You also need to consider other factors like the lock-in period, the legal charges and valuation fees when you refinance.
Timing is key
You should always wait till the lock-in period is over before jumping ship – usually banks offer a lock-in period of about 2 to 3 years and if you refinance during that period, you’ll be charged a penalty fee.
Take note of the date your current bank will increase the home loan interest rate and work backwards from there. The application process takes about 2 to 3 weeks, and you would also need to give at least 3 months’ notice before you can refinance your loan.
It’s best to begin about roughly 4 months before the date of the interest rate increase. This factors in the 3-month notice period that you need to serve before switching banks.
Costs of refinancing
Some of the costs of refinancing your home loan include legal fees, valuation fees and prepayment penalties during the lock-in period, if any. Some of these costs might be subsidised by the bank under some circumstances. If your loan amount is big enough, banks will be willing to defray the legal fees with subsidies. Usually, the loan amount has to be more than $500,000 in order to enjoy the subsidies.
But as they say, nothing is free in this world. Do think carefully before taking on such legal subsidies as they often come with terms and conditions. Mostly, these loans come with a yet another lock-in period. If you don’t stick with this bank for the duration, the bank will claw back the subsidies they gave you.
Perhaps repricing is better for you?
Repricing is similar to refinancing but it’s switching to a different loan package within the same bank. The time it takes to reprice is shorter compared to refinancing which means you can switch to a lower interest rate bank loan sooner. When you opt for a repricing, your bank will usually charge an admin fee which is significantly lesser than the legal and valuation fees that you might need to pay for the refinancing of your mortgage.
If you’re not one to get through all the paperwork meticulously, it is best for you to engage a mortgage broker. Mortgage brokers can be hardworking as humanly possible to push through all the paperwork, but the process still takes time. So, if you’re looking to reprice your home loan, you should approach your broker about a month in advance, and 4 to 5 months in advance if you’re looking to refinance.