Time to refinance your mortgage? Yes, no, maybe


Factors to consider: the additional costs to be incurred, regulations and your financial situation

As interest rates continue their steady climb, many home owners will be wondering if it's time to refinance their mortgage.

It might be a simple question, but its answer is highly complicated.

You have to consider not just the potential savings in repayments but also the extra costs, the products on the market, regulations and your financial condition. There's no one-size-fits-all approach, but as rates are going up, you need to reassess your situation.

Rates on the rise

Mortgage rates are commonly pegged to the three-month Singapore Interbank Offered Rate (Sibor), which is sitting at around 1.139 per cent, its highest level since 2008. Its rise has been dramatic.

Sibor had hovered at around 0.4 per cent for several years, reflecting the near-zero rates in the United States, but it has more than tripled since January.

The US Federal Reserve has signalled repeatedly that it will start raising rates. It held fire on rates last week but increases are surely coming, so borrowers should expect Sibor to keep rising.

If the three-month Sibor hits 1.5 per cent, the floating rates on offer would be around 2.25 to 2.75 per cent, as banks generally add a spread of between 0.75 and 1.25 percentage points.

MoneySmart chief executive Vinod Nair says: "Looking at the data, I believe the three-month Sibor will hover around 1.5 to 1.7 per cent going forward."

Mr Dennis Khoo, United Overseas Bank's personal financial services head, agrees. He says: "It will depend on how the Fed manages the rate hike, but conservatively, we can expect Sibor to rise to 1.5 per cent in the near term."

SingCapital chief executive Alfred Chia says another way to look at it is to strip away the impact of the Fed's actions on Sibor.

"That will give us a 10-year average of three-month Sibor at roughly 1.9 per cent. So you see, the current rates can rise quite a bit more before it catches up with the average.

"Local interest rates are definitely rising, and will continue to do so."

No perfect timing

Despite the challenging interest rate outlook, there is no clear-cut consensus on whether now is the right time to refinance a mortgage.

The impact of rising Sibor on home loans is most visible in floating mortgage rates.

If the three-month Sibor hits 1.5 per cent, the floating rates on offer would be around 2.25 to 2.75 per cent, as banks generally add a spread of between 0.75 and 1.25 percentage points on top of bare rates.

Fixed rates will be even higher, as lenders naturally charge a premium for offering unchanged rates.

The increase differs between banks. At DBS, for instance, fixed rates are around 0.2 percentage point higher than floating rates.

With these numbers in mind, it would seem prudent to take up a fixed-rate package now, right?

Not so, says DBS secured lending executive director Tok Geok Peng.

"You can never get the perfect timing for refinancing. It depends on the situation of a customer.

"You need to know what you are looking for.

"For instance, some look for stability in repayment, in which case I'd suggest taking up a better fixed-rate package.

"But the downside is the borrowers will be locked in for a period of two to three years, during which they will not be able to enjoy any savings if interest rates actually come down."

The notion of interest rates coming down or at least staying flat after the surge under way now is not far-fetched, despite the constant talk about rate hikes.

Sibor is influenced not only by the US Fed rates, but also the strength of the Singapore dollar and, through that, the economic outlook.

As economic uncertainties loom heavily over Asia, the rate and pace of increase in Sibor and loan rates beyond the near term will be hard to estimate.

It also remains to be seen how fast the Fed will raise rates, a matter that is being fiercely debated among officials and economists.

Its move will depend on economic data such as inflation and employment, some of which have yet to see firm growth.

Costs to consider

If you decide to refinance, there may be an extra layer of costs.

Mr Khoo says: "One can consider refinancing if there is substantial savings with a loan package, but the borrower needs to be aware of the additional costs that may come with that, including penalty fees, legal fees, valuation fees and processing fees."

A penalty fee of around 1.5 per cent of the outstanding loan will be incurred if you refinance with another bank before the mortgage's lock-in period expires, which is usually two to three years.

The penalty charge for a mortgage of $500,000 will be $7,500, which may easily wipe out any interest savings and render refinancing pointless.

Mr Chia examined a $500,000 mortgage with a 25-year tenure that carries an interest rate of 2 per cent a year.

"If it is refinanced to, for example, a UOB two-year fixed package now, with the first two years of rates locked at 1.68 per cent and the third year stepped up to 2.28 per cent, there will be interest savings of $1,857.04 in the next three years.

"In this case, I don't think it's worth the trouble."

There is also a legal fee of around 0.4 per cent, which usually applies when a borrower refinances with another bank.

Some banks offer to subsidise legal fees for refinancing deals, but it is not an industry standard.

Mr Nair says: "The extra fees and processes are quite a handful, which is why banks often table less attractive offers when existing customers negotiate for repricing.

"They are counting on you not wanting to go through the trouble."

However, Ms Tok disagrees and says: "It's not a given that you will certainly get a bad deal.

"So really the best advice I can give is for consumers to come forward and speak to mortgage specialists at your bank about your financial situation and what you need."

Regulatory limits

Some home owners may also find their hands are tied due to stringent requirements that accompanied property cooling measures in recent years.

Rules like the Total Debt Servicing Ratio (TDSR), Mortgage Servicing Ratio (MSR) and Loan-to-Value limits have been widely reported, but many home owners and investors remain unsure where they stand in refinancing.

The TDSR framework limits your total bank loans, including mortgages, to 60 per cent of your gross monthly income.

The MSR requirement further limits the amount spent on servicing mortgages to 30 per cent of your gross monthly income.

For those who fear they can no longer refinance, perhaps the first thing to know is that the Monetary Authority of Singapore has relaxed the rules for mortgage refinancing.

Refinancing mortgages for owner-occupied properties is now exempted from the TDSR and MSR requirements as long as the properties were bought before the rules were imposed in 2013, the MAS announced in February last year.

A transition period until June 30, 2017 was also introduced for investment property mortgages to enjoy the same exemption, as long as the owners work with banks to produce a debt reduction plan.

But this does not guarantee that a bank will grant the loans, Mr Chia says, adding: "You may find some banks still sticking to the threshold as part of their internal due diligence. For those who really can't refinance, the obvious choice is to sell the property.

"Less drastically, you can look through your assets and try to encash as much as possible to pay the loans down below the threshold."

Another caveat is the loan tenure restrictions, Mr Khoo says.

He adds: "The maximum loan tenures for the purchase of HDB flats and private properties are 30 years and 35 years respectively.

"However, these terms cannot be extended through refinancing.

"Before home owners embark on refinancing, they must be mindful that shorter loan tenures would require higher monthly repayments and a higher TDSR."

New options

As mortgage refinancing becomes an increasingly difficult decision to make, it is worth noting that new products have emerged that can offer more security and flexibility.

Mr Nair says: "One of the things that I'd recommend to consumers now is the FHR (fixed deposit home rate) home loans being offered by DBS since last year.

"FHR is the average of 12-month and 24-month fixed deposit rates, so the rates of these loans are actually pegged to DBS' fixed deposit rates. That should provide more stability to mortgage rates as I can't imagine DBS raising their deposit rates casually."

Ms Tok says the product has been very popular, with about 80 per cent of borrowers choosing it when refinancing with the bank.

UOB recently rolled out SiborFlex, a hybrid package that combines a 12-month Sibor rate for the first year with the three-month Sibor rate for subsequent years.

A borrower can extend the 12-month rates to subsequent years. As 12-month Sibor rates cover a longer period, they will be lower than the three-month level when interest rates are on an uptrend.

The result is a package that functions like a hybrid of fixed and floating rate mortgages, combining stability with flexibility.

At OCBC, you can combine the bank's variable board rate and three-month Sibor rate in a package, with the option to switch at no cost.

In the end, you have to choose when and how to refinance your mortgage. But make sure it is a decision you make not by jumping on news of rate movements, but with foresight, planning and a good dose of professional advice.

A version of this article appeared in the print edition of The Sunday Times on September 20, 2015, with the headline 'Time to refinance your mortgage? Yes, no, maybe'. Print Edition | Subscribe