Refinancing Loans

Starting the blog about making the most of your money. Faced with current economic uncertainties, I want to share my experiences of how to make the most of my hard earned money with others. I also hope that in return, blog readers can share with me their "secrets" of making the most of their money.

Let me start talking about refinancing my home loan. I think this a one of my biggest money drainer from my budget allocation. You see, I took a 175K loan 5 years ago at an annual interest rate of 7.5% for a tenure of 30 year term. My monthly repayment is 1.2K, of which about 1K goes to just paying the interest. At that time, the typical loan package is BLR + x% (BLR is Base Lending Rate). BLR is based on the OPR (Overnight Policy Rate) which is determined by the central bank and x% is rate above the BLR the bank is offering. The lower the x% is better

Recently, central banks a lowering the OPR which helps lower the BLR to help stimulate the economy and nowadays banks are so competitive that they are offering loans that are lower than the BLR rate (BLR - y%). Here the higher the y% rate, the better it is for everybody

So I decided to refinance last month. Of course, refinancing comes with cost and time which you need to weigh against. The cost of course is bank & lawyer's fees and time is effort taken to research the best deals that the many banks can give.

Refinancing does not mean taking loan from another bank. For me, I stayed with my current bank for another term but re-negotiated the loan rate. The reason is that it seems the easiest for me (not having to go through the hassle of signing a new agreement with a new bank) and I could not afford the cost (legal and bank fees which I think I am supposed to pay like 5K if I switched to a new bank). I can let the 5K fees absorb into the loan but at the end I would have paid more than 5K. I ended up paying a little more interest than the best bank can offer but I figured if I worked hard to clear my loan in the shortest time possible, I would not lose out more than I have to.

So here is my sharing:-

1. For a new or current borrower, spend the time and place to research for the best rate any bank can offer. The best way to start your research is to go to a property roadshow or use the internet to find out for every bank websites what is their current rate. Be aware of the final interest rate, tie-up (lock-in) period, exit penalty terms & conditions and fees

2. For current borrowers, always be ready to negotiate with your bank for the best lowest rate. Use the findings from your research. Remember, you can renegotiate even you are still within your tie-up period. If your bank value you as a customer and the potential of you to bring in more business for them, I do not see why they cannot adjust the rate to the best bank's rate or somewhere close

So here is a little comparison (30 year term, 175K loan):-

1. What I would have paid if I had not refinanced (7.5%) = 440K

2. What I would have paid after refinancing (4.9%) = 351K

Saving of 89K