””

Should I refinance my housing loan? 10 things to consider

Do so only if the savings outweigh the costs and if you foresee interest rates going up

Home owners, who have grown accustomed to consistently low interest rates, take note.

Now would be a good time - if you are able to refinance your mortgage - to review your housing loan options carefully.

Interest rates appear to be heading north with more impetus after long periods at historic lows.

In fact, some early birds had already refinanced their home loans, ahead of the United States Federal Reserve's rate hike announcement last Wednesday.

It was the first US hike in a year - and only the second since the 2008 global financial crisis.

As widely anticipated, the Fed raised interest rates by a quarter-point to a range of 0.5 to 0.75 per cent - still historically very low.

More significantly for many observers, the Fed projected three rate increases next year, more hawkish than the two forecast in September.

US rate hikes affect bank rates, bank savings accounts, mortgages, credit cards and vehicle loans in many places around the world, including Singapore.

At a free askST talk on refinancing home loans at library@orchard, The Straits Times' deputy business editor Dennis Chan's advice was to refinance now as banks are fighting hard for market share and rates are very competitive in this initial period after the Fed decision.

  • Ms Grace Cheng of Get.com says redeeming a loan prematurely can result in penalties such as clawback of subsidies given by the existing lender.

  • Ms Tok Geok Peng of DBS says the home owner should first check with his bank to see if it can come up with other options that can better match his needs.

  • Ms Lee Mei Ling of OCBC has a word of caution for HDB flat owners. Once a loan is refinanced out of HDB, it cannot be refinanced back to HDB.

  • Mr Alvin Liew of UOB expects the Federal Reserve to raise interest rates in June, September and December next year.

  • Ms Selena Ling of OCBC expects the three-month Sibor and SOR to climb to around 1.3 per cent and 1.35 per cent by the end of next year.

  • Mr Vinod Nair of MoneySmart.sg recommends taking up a ''safer'' interest rate package tied to fixed or fixed deposit-linked rates.

Ms Grace Cheng, co-founder and editor-in-chief of personal finance website Get.com, expects to see local benchmark interest rates Sibor (Singapore interbank offered rate) and SOR (swap offer rate) continue to rise correspondingly in the near to medium term.

The Sibor is typically used to price some home loans.

Both the Sibor and SOR rose markedly immediately after the Fed decision, with the three-month Sibor rising to 0.96555 last Friday.

"This would make home financing more expensive, given that the majority of housing loan packages offered by banks in Singapore are pegged to floating rates, with about half of overall banks' housing loan packages pegged to Sibor/SOR and the rest being board-rate and fixed-rate packages," she said.

Ms Cheng added that the ability to capture existing favourable rates could help alleviate the cost of servicing one's mortgage. It would also help to relieve home owners of anxiety amid concerns over rising interest rates, job security and a challenging economic landscape.

10 factors to weigh up before you refinance

Refinancing or re-pricing typically refers to a situation where the property owners move from one housing loan package to another - within or outside the existing bank - with the intention of saving money by reducing interest rates or capturing favourable rates.

But before you rush in, do consider if you are better off:

•Sticking to your current housing loan package;

•Converting to a different package with your existing bank; or

•Taking up a refinanced package with a different bank.

1. INTEREST RATE OUTLOOK

If interest rates are on the rise, it makes sense to refinance at existing favourable rates.

But if interest rates are falling, it is better to keep an eye out for an opportune time to refinance at a lower rate, said Ms Cheng.

Home owners can consider a variety of home financing solutions, including a fixed rate, a floating rate and even a combination, said Mr Lim Beng Hua, head of secured loans at United Overseas Bank (UOB).

2. TANGIBLE BENEFITS

Ms Lee Mei Ling, OCBC Bank's head of home loans product management, advised that home owners can consider refinancing if there are tangible benefits such as savings or an additional facility for investment purposes.

3. LOCK-IN PERIOD AND CHARGES

The lock-in period for home loans usually ranges between one and three years.

This is the period during which the borrower has to keep the mortgage with the bank.

Redeeming the loan prematurely results in the borrower having to fork out charges associated with refinancing.

Consider the various charges and penalties to determine if the potential interest savings outweigh the costs.

They include prepayment penalties (usually ranging from 0.75 per cent to 2 per cent of loan amount redeemed), cancellation fees (0.5 per cent to 2 per cent of loan amount cancelled), legal fees (about 0.4 per cent of loan amount), valuation fees and clawback of subsidies given by the existing lender, said Ms Cheng.

Ms Lee said that in such a scenario, you should refinance your loan only if the savings from the reduced commitment are greater than the penalty charges.

4. SUBSIDIES Some banks

offer subsidies to encourage prospective customers to take up their home loans.

The subsidies help to defray the cost of refinancing your home loan and usually pertain to legal fees, valuation fees and free fire insurance premiums.

For instance, OCBC provides cash rewards of up to $2,000 for this purpose.

5. INTEREST RESET DATES

This applies to loan packages pegged to Sibor or SOR.

So if you have such packages, bear in mind that you may incur penalties for redeeming the loan outside the specific interest reset dates.

"Let us assume you take up a loan on March 1 which is pegged to three-month Sibor. Since the loan interest rate resets every three months, you may redeem the loan only on March 1, June 1, Sept 1 or Dec 1. Otherwise, you may incur a penalty that usually ranges from 0.5 per cent to 2 per cent of the loan amount redeemed," said Ms Cheng.

6. REFINANCING REGULATIONS

Switching from one bank to another or changing the pricing package within the bank is subject to prevailing regulations on refinancing.

One such regulation is the Total Debt Servicing Ratio (TDSR) framework which requires a comprehensive assessment of affordability, taking into consideration a borrower's present and future commitments.

Ms Lee pointed out that the Monetary Authority of Singapore (MAS) has fine-tuned the framework to allow borrowers more flexibility in managing their debt obligations.

 

This is in response to feedback from some borrowers who are unable to refinance their existing property loans owing to the application of the TDSR threshold of 60 per cent. From Sept 1 this year, the two key changes are:

•TDSR need not be computed or applied to a borrower who is refinancing a housing loan on an owner-occupied residential property.

•TDSR need not be computed or applied to a borrower who commits to a debt reduction plan comprising a repayment of at least 3 per cent of the outstanding balance over a period of not more than three years.

In order to help potential home owners determine their TDSR for mortgage loan applications, UOB launched an online property loan calculator last year.

"This free service makes it easier for property buyers to find out how much they can borrow before they submit their loan applications to the bank.

"It also offers customers the option to pledge financial assets such as unit trusts, shares and bonds, and structured deposits as additional income streams for a detailed mortgage analysis," said Mr Lim.

7. HOLISTIC VIEW

It is a common myth that home owners should refinance with another bank to enjoy a better loan package, said Ms Tok Geok Peng, DBS Bank's executive director of secured lending.

"We urge home owners to speak with their banks first. As most of us will not be able to remember the details of our loan package, speaking to your bank helps you understand the features of your current loan packages and know if there is any lock-in condition and fees payable if you refinance with another bank.

"Share your concerns with your bank as they could advise you to either reprice your loan with another loan package which better suits your needs now, or help you explore other options," she added.

  • How high can rates rise?

  • MR ALVIN LIEW, UOB SENIOR ECONOMIST:

    "The US Federal Reserve, as widely expected, raised the policy Fed Funds Target Rate by 25 basis points from 0.5 to 0.75 per cent in the December 2016 FOMC meeting with a unanimous decision. We are now more hawkish for the Fed rate trajectory in the coming years.

    "As we expect the Fed Reserve to adopt a pragmatic approach towards the likely Trump fiscal boost, details of which will only gradually become available, we believe that the Fed will remain on hold in the first quarter of 2017.

    "Thereafter, we expect a faster trajectory with three rate hikes of 25 basis points each in the June, September and December FOMC meetings in 2017."

    MS SELENA LING, OCBC BANK'S HEAD OF TREASURY RESEARCH & STRATEGY :

    "If you look over 2016, both three-month Sibor and SOR have trended lower over the course of the year until very recently. In fact, Sibor has actually been very stable from July-October, whereas SOR is more reactive to the currency gyrations.

    "Post-Trump victory and the ensuing bear-steepening of the US Treasury yield curve, domestic short-term interest rates have begun to edge higher as well going into the year-end, when liquidity and trading volumes traditionally also lighten up.

    "Our forecast remains for the three-month Sibor and SOR to climb to around 1.3 per cent and 1.35 per cent by the end of next year."

    MS GRACE CHENG, CO-FOUNDER OF GET.COM:

    "The US Federal Reserve has just announced a quarter-point hike to the Fed Funds rate, with an indication of three quarter-point hikes next year and a projection of three additional rate hikes each year in 2018 and 2019.

    "Based on recent historical records of actual US Fed rate movements coupled with a volatile global economic landscape, the general market consensus is that further interest rate increases, if any, would be maintained at a gradual pace in the near to medium term."

Ms Lee suggested that home buyers and owners take a holistic view that goes beyond just pricing.

"As a home loan is a long-term commitment, they should consider the overall package which best meets their needs, including the advisory service from the mortgage specialist," she said.

In addition, consider the benefits of refinancing in conjunction with one's decision to sell the property.

Home owners can consider a range of home-financing solutions, including a fixed rate, a floating rate and even a combination, says Mr Lim Beng Hua, head of secured loans at United Overseas Bank.

Ms Cheng said home owners who are not looking to sell their property within the next few years could enjoy interest savings by refinancing at a lower rate.

But those intending to sell in the near term may see the cost of refinancing negate the potential interest savings.

8. OTHER OPTIONS TO MANAGE YOUR HOME LOAN

There are several options to manage your home loan commitments, such as reducing the loan size by paying down the capital lengthening your loan duration.

Ms Tok noted that more home owners (about 10 per cent more) perform capital repayment to reduce their loan amount at the beginning of the year, probably using their bonus or savings.

"This is a good practice to reduce your financial commitment, especially if these are spare funds where you are unable to get a yield higher than your loan rate.

"Generally, we advise home owners to use cash instead of CPF funds since CPF pays at least 2.5 per cent and the funds could be used for retirement or for a rainy day," said Ms Tok.

Regardless of interest rate trends, she advised those who have a mortgage to service to set aside funds as a buffer against rate hikes or any unforeseen circumstances.

"Ideally, home owners should set aside some savings in cash, CPF funds or liquid assets that can be used to pay their monthly instalments for the next two years.

"This gives them sufficient time to restructure the loan or even sell the property should they run into any financial issues," she said.

9. HDB HOME OWNERS

Home owners who take a home loan with the Housing Board enjoy a fixed rate - now at 2.6 per cent - throughout the loan tenure.

HDB offers housing loans at a concessionary interest rate of 0.1 percentage point above the CPF Ordinary Account rate.

Ms Lee said: "Do note that once a loan is refinanced out of HDB, the loan cannot be refinanced back to HDB. Hence, customers should be very sure of settling mortgage commitments with a commercial bank once a loan is refinanced out from HDB."

10. REVIEW YOUR HOME LOAN

Review your housing loan once every few years to see if it would be more advantageous to continue with your existing package - particularly after your lock-in period.

Ask your bank for repricing options before checking with others.

A version of this article appeared in the print edition of The Sunday Times on December 18, 2016, with the headline 'In your own interest to refinance housing loan?'. Print Edition | Subscribe