what to consider when refinancing home loan

4 Things To Consider Before You Refinance Your Home Loan

With expected rising interest rate environment going forward, you may be considering and unsure if you should refinance your home loan now.  It can be a complex decision involving many variables and some guessing work as to how interest rate will move.  To help you make that decision here’s some key factors you should look at :

1. How stable is your income over the next 5 years

Unlike in the US, there is no fixed rate mortgage for 15 or 30 years in Singapore, in fact our fixed rate term (usually 2-3 years) is even shorter than that of the ARM (adjustable rate mortgage) in US where the interest for the initial 5 or 7 years could be fixed before it becomes floating usually indexed to Libor.

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Hence it is important to consider your business or career plans.  As you do not want to be caught out by rising interests and being in a position where you are unable to refinance your loan to another bank due to a drop in income when one spouse takes a break for whatever reasons.  If that is your situation in the next 5 years, you might want to give up the advantage of a fixed rate home loan (as it always reverts to a higher floating rate once the fixed rate period is over) and simply go for a floating rate package where the spread stays low thereafter.

2. Owner-occupied vs investment properties

As the central bank in Singapore allows for more leeway when it comes to refinancing of your own-stay property (TDSR 60% exempted), and commercial banks in general also assign lower risk for owner-occupied home loans, it makes sense to go for a fixed rate strategy for maximum savings when interest rate is on its way up.  However for investment properties, it might be wise to go for a floating rate with the lowest longer-term thereafter spread.  This is because after 30 Jun 2017, borrowers will need to comply with TDSR strictly failing which they will not be able to refinance or even reprice their loan, if the current rule stays.

3. Your ability to pay down on the loan if need be

Many clients we talk to have taken out more mortgages than they need in the last few years as borrowing costs remain all-time low.  They would rather put their own money in various investments that earn them a much higher return than the mortgage interest of 1-1.2% p.a.

At which point would that all change when interest heads north is a question for the individual.  If your fixed income portfolio is returning you an average of 5% p.a. it still make a lot of sense to service the mortgage even if it rises to 3% p.a.  However you may suffer losses on your principal investment depending on your entry price as bond prices come off with rising interest.  That is a topic beyond our scope here.

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Generally I would say for your own-stay property most people probably will not like the idea of servicing a mortgage interest of above 3% p.a. and hence you might want to seriously look at an interest offset account for your owner-occupied home mortgage.  Not all banks in Singapore offer that, in fact only a handful.  And one in particular just recently revised some of their features.  Speak to our consultants to find out more.  The key reason why you want to explore that is when interest goes above 3% p.a. eventually, instead of paying down the loan you could make use of this feature to bring down your interest costs while waiting for distressed property sales to surface before redeploying your funds to take advantage of such markets.  You will not need to reapply to the bank to get more loan.  In that sense, interest offset account gives you lots of flexibility to control your leverage level to suit varying market conditions.

4. How lettable is your property?

For investment properties the more critical question is to ask yourself how easily can you find a tenant so that you always have rental income to defray your monthly mortgage repayment without dipping into your own funds.  If the answer is yes, then you should probably keep this property for longer term and sell the one where you are not too sure, unless of course you are keeping it for other reasons like potential of enbloc etc.

This is also an important consideration when it comes to meeting the TDSR requirement for refinancing as for banks to take in your rental income, you must always have a lease of more than 6 months remaining.  You do not want a situation where you take much longer time than expected to find a tenant which affects your ability to refinance the home loan.  You will then be forced to service the higher interests on the mortgage without the cash flow from rents – a double whammy.

To some extent this question may also apply to your owner-occupied home mortgage as you want to have the option of renting out the property which has the highest monthly repayment (usually the biggest home where you are staying) should interest costs become too exorbitant.

At MortgageWise, we seek to be your mortgage solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner in Singapore when you buy your next property. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with successful careers in banking & real estate before becoming an entrepreneur.
View all posts by Darren Goh

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