By: Zeng Han Jun, CPCG,
Singapore
Many home owners took up a fixed
rate housing loan when its rate is relatively low. A fixed rate
housing loan also gives the home owner a peace of mind, without
having to worry about fluctuations. However all good things come to
an end. Your fixed rate term expires and it starts to float. For
some, the rate really balloons up and then you wonder if you should
refinance now.
Frankly speaking, when should you
really refinance? Should you refinance after the lock in period?
Refinance within the lock in period? If you decide to refinance
within the lock in period, at which point of time will you be doing
it?
Before we go into that, let’s
spend some time understanding the refinancing process. When you
send in your application, the contract takes about 2 – 3 weeks to
get back to you. After you have signed the contract and appointed
your lawyer to do the conveyance, he or she will probably take
three to six months to complete the process.
Now let’s look at this example:
You are holding onto a fixed rate housing loan at 3% and it has
expired. It balloons up to 5%. With the extra 2%, of course you
will feel unhappy about it, so you decide to refinance now.
However, you will still be paying at 5% for the next three to six
months before your home loan gets refinanced to a lower rate.
Remember, the interest you paid to the bank cannot come back to you
at all. The money you saved from refinancing can be pumped into
alternative investments. No matter what kind of investment you have
decided to take up, you are allowing that amount of cash to work
harder.
Looking at the above example, you
will realize that you should start considering refinancing, three
to six months before your fixed rate expires. By positioning
yourself to refinance earlier, you are effectively saving more
money in the long run. This is also known as “lean finance”. Of
course, what if your housing loan has penalties, claw backs and so
on? Different people have different terms in their contract. It is
better to talk to your mortgage advisor about it, so he or she can
help you with your refinancing option.
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