A good time to refinance home loans?

After the Monetary Authority of Singapore moved to fine-tune the Total Debt Servicing Ratio (TDSR), reader Scott Driscoll wanted to know if now would be a good time to refinance home loans pegged to Sibor. Would it be wiser to keep his home loan pegged to Sibor or go for refinancing, he asked.

Assistant Business Editor Yasmine Yahya found the answers to these and other questions.

The Monetary Authority of Singapore (MAS) made a few changes to the TDSR framework on Sept 1 so that it would be easier for home owners to refinance now and take advantage of the low interest rates being offered.

According to Ms Grace Cheng, co-founder and editor-in-chief of lifestyle and personal finance website GET.com, floating-rate loans which are pegged to the Singapore Interbank Offer Rate (Sibor) and Swap Offer Rate (SOR) have largely maintained their popularity among home owners as these rates have remained subdued since they plunged to near-zero levels in 2011.

These rates are expected to stay low in the near term amid the weak global economic environment and any increase in the near- to medium-term is anticipated to be gradual, she said. "You should refinance your home loan as long as there are interest savings, after taking into consideration any redemption penalties.

"Typically after the lock-in period, it would be a good time to compare the different home-loan rates in the market and see if there are any packages that are better for you. If there are cheaper home-loan alternatives, refinancing could save you from paying more interest on your loan in the long run."

You can check out the latest fixed and floating rates using the Home Loan Genius comparison tool on GET.com.

If you are interested in refinancing to another floating-rate home loan but would like to mitigate the risks or uncertainty in interest rate movement, you could consider a loan that comes with the flexibility to switch across different Sibor tenures, Ms Cheng noted.

Alternatively, a fixed-deposit home loan would provide more transparency in the annual interest rates since these are pegged to the bank's fixed-deposit rate which is publicly available, rather than the mysterious board rate or more volatile Sibor and SOR.

Q What do the changes to TDSR entail?

A The framework or rules, introduced on June 29, 2013, were implemented to encourage home buyers to borrow within their means. The TDSR limits the home-loan quantum by ensuring your monthly repayments for all your debts - mortgage, credit cards, car loans, personal loans, and so on - do not exceed 60 per cent of your monthly income.

So, if you and your spouse earn a combined $10,000 a month and the total of all your credit card, car loan and personal loan repayments is $4,500 monthly, your TDSR threshold is $6,000 (60 per cent of $10,000). This means the maximum monthly repayment for your home loan cannot exceed $1,500 ($6,000-$4,500).

Q Who is affected by the changes?

A The changes affect two groups of people: People with an existing property loan for the house that they live in and people with an existing investment property loan.

For the first group, a home owner who wants to refinance the mortgage on the house that he lives in will now be exempt from the TDSR's 60 per cent rule, regardless of when he bought the property.

For the second group, a borrower can refinance his investment property loan above the TDSR threshold regardless of when the property was bought, if he meets two conditions:

  • He commits to a debt-reduction plan with his bank to repay at least 3 per cent of the outstanding balance on his property loan over three years, and
  • He passes the bank's credit assessment.

Q How are the changed rules different from previous TDSR rules?

A Previously, loans on owner-occupied homes were exempted only if the property was bought before June 29, 2013.

And investment property loans were allowed to be refinanced above the 60 per cent TDSR threshold only if the borrower applied by June 30, 2017. This deadline has now been removed.

The borrower would also have had to commit to a debt-reduction plan with his bank before the rule changes. However, the announcement on Sept 1 specified the terms of such a plan.

Q Does this mean new home loans are exempt from TDSR too?

A No. The TDSR rules will continue to apply to new property loans. The MAS has said that the tweaks announced on Sept 1 are not a relaxation of property-market cooling measures.

Q How many people can benefit from the changes?

A Just a small minority of borrowers. Only about 2.5 per cent of home loans made after the TDSR rules were implemented are currently above the 60 per cent threshold.

Q Why did the MAS decide to make these tweaks?

A MAS said it had received feedback that some borrowers who wanted to refinance their home loans to take advantage of the current lower interest rates were unable to do so because of the TDSR threshold. Now they can go ahead and refinance and pay lower monthly instalments.

A version of this article appeared in the print edition of The Straits Times on September 17, 2016, with the headline 'A good time to refinance home loans?'. Print Edition | Subscribe