More Home Owners In S’pore Thinking Of Refinancing Loans To Save More Money

Okay, the headline might sound chim but if you’re here because you want to save some money, we’ll make it so simple your primary three kid could understand.

First thing first, what’s a refinancing loan?

Basically, it just means you borrow money to pay off a previous loan so that you can enjoy a new loan that has better terms and conditions (read: pay lesser for monthly instalment, etc).

Let’s take a simple example:

You owe Jackie, a not-so-close friend $1,000. You were in need of money and he says he can lend you the money provided you pay an interest of 20% within 1 year.

This means instead of $1,000, you have to pay back $1,200. Divide it by 12 months and your monthly instalment is $100.

So you’ve been paying for two months and now, you’re left with $1,000 (10 months) to pay it off.

Then, Jane comes along. Jane is a better friend and she says she can lend you $1,000 with an interest rate of 10% if you pay back within a year.

So if you borrow from her, you’ll have to pay $1,100 in total, which comes out to $91.67 per month.

With the drop in interest rate, you’ve just saved $8.33 in monthly instalments.

Replace Jackie and Jane with two different loans (can be different banks or within the same bank) and you get a simplified version of what refinancing a loan means.

And this is what many home owners here in Singapore are looking to do.

More People In S’pore Looking Towards Refinancing Loans To Save More Money

According to The Straits Times, Standard Chartered Singapore, UOB and DBS Bank have received more refinancing enquiries over the past few months.

A Maybank spokesperson also said that they’ve revised down their interest rates between 0.25 and 0.35 per cent within the last three months.

This has resulted in “a high percentage” of their customers choosing to “reprice their loans” within the bank.

Most home loans are pegged to the Singapore inter-bank offered rate (Sibor) which has dropped to 0.56 this month.

A possible reason for the drop is the US Federal Reserve cutting its interest rate to almost zero in Mar 2020 to cushion the economic impact of Covid-19.

Based on its history, Sibor has always been closely related to US Fed rates (i.e. when US Fed drops, Sibor will drop and vice versa).

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A Good Chance For Home Owners To Pay Lesser Monthly Instalments

Jackie is the pre-Covid-19 interest rate while Jane is the post-Covid-19 one.

So it might be a good idea for homeowners who are paying over 2 per cent interest rate to see if they can cut it down by half.

Like Mr Aizat Taha who eventually settled down on a UOB refinancing loan.

Initially paying a monthly instalment of $1,580, he now saves $160 a month, which can add up to $20,000 to $25,000 savings in long-run.

Not Everyone Is Suitable For Refinancing Loans

With that being said, not everyone has the ability to take refinancing loans, nor should all of them choose to do so.

If you’re thinking of refinancing, you should first look at:

• your personal cash flow
• current financial situation
• and your life plans

Only Refinance If There Are Benefits

There are other reasons for refinancing loans, of course, such as shortening the duration or lengthening it, among many others.

Think 25 years is too long and you want to get it over and done with within 15 years? Refinance.

Monthly instalments too high and you’re looking to spread it out over 35 years? Refinance.

Each decision comes with a drawback and it’s up to individuals to decide if they’re able to handle the consequences.

For example, a shorter-term loan means you have to pay a higher amount per month so you can’t afford to lose your job.

A longer-term loan means you have to pay extra thousands of dollars over your lifetime which, honestly, makes our inner Singaporean feel like they’re dying.

At the end of the day, a financial expert once told me before: “you’ll only refinance loans if there’s something in it for you.”

If there’s nothing, or the results might be consequences you can’t handle, you might want to just take it easy and look for an opportunity next time.