Saturday, 4 February 2017

Property Loan Refinancing

Like many first-time HDB flat owners, my wife and I took up the HDB loan when we got our unit more than 3 years ago.

It's so convenient - we could settle it right at HDB hub when we were there. Furthermore we have so many other things to settle.

One and a half years down the road after we collected our keys, we began to look closer at the home loans offered by the banks. Even then, we were only looking casually.

Refinancing is very far back in our minds... Until one fine day when we decided to do a simple spreadsheet to see how much we can save...

For our HDB loan, my wife and I were paying $300+ a month each from our CPF. No cash involved. Repayment period was spread over 25 years.

At that time POSB was offering a home loan which was quite attractive in my opinion. The interest rate of the home loan is based on a fixed 1.58% + the prevailing fixed deposit home rate (FHR) up to the prevailing interest rate under CPF OA.

Simply said, the POSB interest rate will only go up to a maximum of 2.5% which is lower than the HDB's loan interest rate of 2.6%.

So wifey and I went to a branch on a weekend to find out more and the rest as they said, is history.

We refinanced with POSB home loan with a repayment period of 8 years. Why 8 years?

Because POSB guaranteed the interest rate to be lower than HDB's for the first 8 years only.

At the time of our refinancing, the FHR was 0.4%. So our interest rate was 1.98%.

After the refinance, we are now paying about $750 a month each. The repayments are still coming from our CPF accounts without touching our cash.

So what's our savings achieved from this action?

Remember I mentioned about a comparison spreadsheet we did to estimate the savings?

To make the comparison simpler, we used a total monthly repayment amount of $1,500 for both cases and monthly interest rates are set as 2.6% and 1.98% for the HDB loan and POSB loan respectively.

The savings achieved is about $4,400.

If compared to our original monthly HDB loan repayment amount of $600+ and repayment balanced period of 23.5 years, the savings would be even greater at $34,300!

In other words by switching our original HDB loan to the bank loan, we saved $34,300.


What led us to go for the refinancing with POSB:

1) Guaranteed lower interest rate than HDB's for the first 8 years.

2) Legal fee of $1,600 and valuation fee of $200 were reimbursed to us by the bank. (Although we have to pay the $14 GST on the valuation fee)

Cons:

1) Need to make time for the valuer to come to your house for a valuation.

2) Need to go to the law firm to sign some documents on a week day. But hey, just take a day's leave and treat it as a break to enjoy the day.

All these to us are minor inconveniences.

More importantly, remember the bank loan's interest rate is subject to change depending on the prevailing FHR.

At this point of writing our rate is 2.18%. Still lower than the 2.6% from HDB.

Another important point to note is that you must do your own calculation to see how much you can afford to pay from both of your monthly CPF contributions while leaving some portion in your CPF accounts as a buffer for rainy days.

Whether it's worth to refinance or not, remember to do your homework to help yourself make a better decision.

Last but not least, Happy Lunar New Year to everyone!

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