Change is never easy because it involves conscious effort to move the course of action. But what if the change can give you monetary benefits? Will you still be sceptical to accept it? Whether or not we want to take a loan, there are many instances in life that compel us to do so. Once you give in to this compulsion, there is a new responsibility on your hand.
Think about home loan refinancing
Home loans are one of the most common loans. Of course, because it is everyone’s dream to have a perfect home for your perfect family. And because it is your dream home, it never comes cheap. And hence the compulsion of taking a loan to fulfil your dreams.
Your dream to own the perfect home will never change. But the interest rates at which home loans are offered are constantly changing. Before you get caught in the cobweb of interest rates, you should know, that more often than not, banks offer lower interest rate packages to new customers than to existing customers.
Think about it. As an existing loan payer, you are currently paying a higher interest rate than someone whose loan just got approved. Therefore, it is time for a change.
Understanding the refinancing process
To thoroughly enjoy the benefits of the competitive home loan interest rates offered to new customers, you will need to transfer your home loan. This can be done through refinancing. You might wonder how long this process is going to take because you have already gone through this tedious process earlier when you applied for your existing home loan.
But look at it this way. You already have the experience of applying for a loan so you know what to expect. You are aware of how this process works, so you can use that experience to shorten the process. Besides, if transferring or switching home loans is going to save you a lot of money, then it is definitely worth the wait.
Related: Is HDB Loan Refinancing a Good Idea?
Let’s explore the steps that you will need to take to refinance your home loan.
1. Analyse your benefits
Why would you accept change if you are not benefiting from it? So, here is what you need to do first: research and analyse how much you will be saving if you switch to a home loan with a lower interest package. That will give you an idea if the switch is worth it in the first place.
Here is what you should be analysing –
- Are you currently on a fixed rate home loan package? If yes, then you are more likely to have to pay a prepayment penalty for preclosing the loan. In this case, it is not a good idea to switch home loans. Because what you could save through a lower interest rate package, you will end up paying as prepayment penalty. But if there is no prepayment penalty in your agreement then it is a viable option for you to switch home loans to a better package.
- Floating rate packages generally have a higher interest rate structure and therefore you will be saving significantly if you switch to a lower interest rate package. This is because, when the interest on the loan is high, the larger portion of your monthly instalment will go towards your interest, and the lesser portion towards the repayment of your principal loan amount. This will invariably increase your loan tenure.
- If you already are on a long repayment tenure for your home loan, then you should definitely consider switching to a shorter loan tenure because the longer the tenure, the more interest you will be paying on your loan.
- Before you fall for the “attractive” interest rates offered by another bank, you need to look for any hidden costs involved. This could be documentation charges, Stamp Duty on a new mortgage deal (which some banks do not include as part of the processing fees) or any other charges that are not advertised. Add the hidden costs and then evaluate if the new offer is better. If not, you need to keep looking for one that is.
Typically, this step should not take you more than 15 minutes to complete, because all leading banks have home loan calculators and balance transfer calculators on their website. These calculators allow you to estimate what package you can get and what your savings would be.
2. Obtain a No Objection Certificate (NOC) from your bank
You will need to get an NOC from your existing bank in order to proceed with the home loan refinancing. Without this certificate, you cannot transfer your home loan to any other bank. A No Objection Certificate typically comes with three documents:
- Your payment history
- Your foreclosure letter
- A list of your documents that are in possession of the bank
Now, this step can be a little tricky. When you approach your bank for this letter, like any business, your bank will not want to lose a customer. They will try to retain you by offering you a better interest rate package.
At this point, it may be better to transfer your home loan to the new package offered by your existing bank. And then, get a counter offer from a new bank with the added effort of going through the entire process again. Why? Because the difference might not be significant (if there is any in the first place).
If you reject the bank’s offer for another interest rate package then obtaining the NOC from your existing bank can take anywhere between one to three weeks.
Additional reading: The True Cost of Getting a 4-Room Flat in Singapore
3. Applying to the new bank
If you have decided to switch your home loan to a new bank, then you should know what documents (apart from the regular home loan papers) are required for the application. Along with the NOC from your existing bank, you will need certain additional documents that may include the following:
- An NOC from your builder/housing society
- Income Proof documents
- Proof of Ownership of your property
Based on your documents, the bank will evaluate your ability to pay the loan’s monthly instalments. This is the stage of negotiation for your desired loan tenure, interest rates and repayments. The next step will decide if you are eligible for the interest rate package you desire.
This is the shortest step in this process. Applying for a new home loan package/refinancing at a new bank should not take you more than one day.
Check this out too: Renting vs Owning a House: Which is More Practical in Singapore?
4. Passing the credit check
Your eligibility status for the new home loan and at the rates that you want will be evaluated during this stage. The bank will check your credit report and credit score. During this stage, the new bank will conduct extensive background checks. They will also retrieve your credit report from the credit bureau. The bank may even ask you to submit additional documents as and when required. They may also ask you questions about what they find during their background checks. During a typical background check, the bank will evaluate the following:
- Your credit report
- Your income and employment stability
- Total Debt Servicing Ratio (TDSR) or debt-to-income ratio
- The authenticity of your ownership over your property
The bank may also request for additional documents based on what more information they need. Once you have passed the credit check, the bank will make you an offer. They will give you a letter with all the details of the home loan package they have for you. Once you read the offer and the terms & conditions thoroughly, you will have to then make a decision between the following:
- Should you switch your home loan from your existing bank to the new bank?
- Should you switch from your current home loan package to a lower interest rate package offered by your current bank?
The process of your credit approval and getting an offer from the new bank can take between two to three weeks.
5. Documentation and the final switch
Once your decision is made, you will need to complete the documentation process with whichever bank you have chosen. You may be nearly at the end of the switching process, but you may get in trouble if your old bank is only willing to release the cheque after you have submitted all the required documents. And, they are only willing to release your documents when they have received the cheque for the remaining principal loan amount.
In order to solve this problem, you will need to request a meeting between both the bank representatives. Your new bank can hand over the cheque of the balance of the principal loan amount to your old bank, and your old bank can hand over your documents to the new bank. This will then end the transfer process successfully.
This step could take you approximately 1 to 3 weeks to complete.
Once you have completed these stages, you will then have your new home loan at a much lower interest rate. This will help maximize your savings and put your hard-earned money to a much better use, instead of making interest payments on your high-interest loan.
To get a clearer understanding of how long the entire process of switching your home loan will take, we’ve made a sweet little table.
|Stages Involved in Switching Your Home Loan||Duration|
|Analyzing your Benefits||15 to 30 minutes maximum|
|Obtaining a No Objection Certificate (NOC) from your bank||1 week to 3 weeks|
|Applying to the New Bank||1 day|
|Credit Approval Process||2 to 4 weeks|
|Process of Documentation||1 to 3 weeks|
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