Author: Daniel Tan
Written at: 14 Nov, 2023
A recent survey shows many homeowners are not even aware they can refinance their property. For those who know, there are often a few major mistakes made:
Not comparing around
A property is often a person’s largest investment in life, and so a home loan is usually the biggest loan we will ever take. Often spanning a few decades and costing hundreds of thousands, many homeowners take more time to find the perfect colour to paint their wall than to find a suitable loan. Instead, they will just take the time to enquire from the few banks they are familiar with or recommended by other homeowners - when rates are constantly changing-even though what may be applicable to them might not be applicable to you because of different borrower’s profiles.
A loan of just $500,000 and spanning 30 years at 1.35% and 1.45% p.a have a difference of $15,000 in interest.
Not comparing all other factors
Another mistake made by property owners is jumping at the new and lower interest rate they found, failing to take the terms and conditions of both their existing and new loans into consideration.
A bank may offer a competitive rate, but lock you in for a period of time. This may work for you if you believe the interest rate will trend higher and you will not be refinancing your loan any time soon. However, if that is not the case, without taking into consideration of the early redemption fee, it may erode any savings you may enjoy when refinancing into a lower interest rate.
At times, a banker or broker may be excited to share with you how much lower you might be paying each month, but forgetting to mention that there are other fees such as valuation and legal fees that may be incurred again. Make sure you also compare these fees, instead of just comparing the monthly instalment you have to pay.
Not comparing apple to apple
A new loan with the same interest rate calculated with a 30 years repayment vs a 15 years repayment will naturally show a much lower monthly installment, as you are spreading it out over a longer period, although your overall interest paid is much higher.
Make sure that when you are comparing a quote, the new loan's tenure is equal to your current remainder (e.g 20 years loan with 10 years left) to ensure there are real savings and not because of how it is presented.
Also, it is important to understand how amortization works. In amortization, the monthly repayment of the first few years largely goes towards paying off the interest and not the principal. You cannot assume that if you have been paying the loan for half of its tenure, the outstanding principal is halved. So, ensure the math is done on the correct outstanding to have an accurate quote.
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