As interest rate continues to run up unabated, it is timely to do a review on your housing loan and in this article we will look at 5 surefire ways you could reduce your borrowing costs.
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1. Lock Down Fixed Rate Today
In this blog, we have been warning of rising home loan fixed rates since two months ago. And as local banks announced raising their fixed rates further in November to 2.28% (2-year fixed), and HSBC ending their current fixed rate promotion (one of lowest) this week, we are drawing near to the scenario we predicted a while back – there will be no more sub-2% fixed rates in the market soon. The last remaining banks to offer fixed rates of below 2% for housing loan are Hong Leong Finance (1.88%) for hdb property and Bank Of China (1.95%) for private properties of loan above $500,000. Every one else is above 2% now with the withdrawal of HSBC fixed rate packages this week.
If US Fed follows through with one more rate hike in December and three more forecasted for 2019, there seems to be no reprieve in sight yet for homeowners, not until when the fed funds rate itches closer to its longer-term neutral rate of 3% by end of 2019.
For those with lock-in ending within the next 6 months (by April 2019), quickly contact us to lock down a fixed rate housing loan package now when it is still at the 2% range. Yes, unknown to many, we can do that as early as 6 months before with some minor trade-offs in the period of fixed rate term one will enjoy. Our experienced team of mortgage consultants will explain how it works. As I put to you that if fed fund rate rises to just 2.50% (if we reduce the forecasted number of hikes going into 2019 due to trade war and undue influence from the White House), 3-month SIBOR here in Singapore is not going to stay at the current levels of 1.64%. See our correlation chart. This means that fixed rates for housing loan would most likely rise up by approximately another 50 basis points from where we are today.
2. Reduce The Tenure
This is certainly going against what most bankers and mortgage consultants would preach. Before we explain this point, let us give one caveat – when this is a 1stloan on a property at the point of purchase, there is some merit in the argument to go for a longer tenure as in subsequent refinancing, certain banks may not allow one to increase the no of years from the original tenure of the loan. Of course, reducing it is of no concern to any bank as long as one could still meet TDSR (total debt servicing ratio) with a higher monthly repayment that comes with a reduced tenure.
For those who has no concern on cashflow to service a higher repayment every month, and especially for owner-occupied homes where there is no monthly rental to defray interest costs, the best way to reduce interest costs is to shorten the tenure.
Most homeowners focus on reducing the interest rate per se during refinancing, but forgot to look a closer look at tenure as a lever to cut interests. There are two drivers behind how much of the mortgage repayment you pay every month goes to interests and how much of it goes to reducing the principal loan. Ceteris paribus, know this:
“The higher the interest rate, the bigger is the interest-component in the monthly repayment and less goes to reducing the loan;
The longer the tenure of the loan, the bigger is the interest-component in the monthly repayment and less goes to reducing the loan.”
We have illustrated this point clearly with a case study in another article which you may want to read here.
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3. Do Partial Repayment – Immediate And During The Lock-In Period
To pay down partially on the outstanding loan when one refinances is an obvious way to reduce interest costs. The art is in deciding how much to pay down and how much to stash away as emergency funds or funds you could deploy quickly when opportunity arises like during a market crash etc.
Perhaps one good way is to do a combo loan – many in the market are still unaware of this option, which is available today via three banks. Simply set a target how much one likes to pay down within the next two to three years. For example, on a $700,000 housing loan, one may reason that with expected bonuses at year-ends and excess funds accumulating in the CPF Ordinary Account (OA) balance, there is a very high chance of paying down a further $100,000 over the next two years. Simply take $100,000 in a floating rate housing loan with no lock-in or one that allows partial redemption, and the remaining bulk of $600,000 follow what we advocate in our first point – lock down with the lowest fixed rate housing loan as there is no intention to pay down on that portion.
Incidentally, one noteworthy point here – whenever cash flow is not a concern, one should always service the housing loan in cash instead of from CPF. Until such time mortgage interest rate rises above the CPF OA interest of 2.50%, unlock the CPF funds to reduce the outstanding loan. Why? Think of it this way, if CPF Board wants to work hard to achieve a risk-free (to you) return of 2.50% p.a. by investing your money, let them do it. If one uses his CPF funds to service the home loan instead, not only does he deprive himself of this guaranteed return, he has to make that 2.50% return per annum himself to pay back to his CPF as accrued interest when he sells the property later. Tough. Unless of course one is a professional fund manager by training and achieves a much higher annualised rate of return above 2.50%, then by all means service the mortgage from CPF and deploy his cashflow for investment. But how many of us can do that consistently?
4. De-couple At The Same Time When One Refinances (And Buy A 2ndProperty?)
This recommendation helps not only reduce interest costs in the long run, but one’s overall transaction costs for those planning to buy a second property for investment. But it certainly carries some risk. So, caveat emptor!
With new cooling measures announced on 6 July 2018, ABSD (additional buyer’s stamp duty) has gone up to 12% on a second property even for a citizen. We have predicted that the trend for couples to “de-couple title” on their first private property will continue and become even more popular. As de-coupling of property title involves significantly higher legal fees (market rate $5,000-$6,000), the best time to do it is during a refinancing exercise where there are banks who may still provide partial legal subsidy (most banks do not offer subsidy when there is a purchase component like in de-coupling). Speak to our consultants who can advise you on this.
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How can de-coupling then saves money when one has to spend more on transaction costs and put down more money for downpayment of a second property? This requires taking a longer-term perspective. First, a couple who are both citizens would save on paying 12% ABSD when the outgoing spouse (for example the wife) buys a property in her own name. Next, although collectively they now take on more loan with the husband assuming the full loan on the first property, and the wife taking out a new purchase loan on a second investment property, the difference is – there is now rental income to help pay for interest costs on both housing loans. We will illustrate this with one quick example below:
Total interest on both properties in 1stmonth = $1,250 + $833 = $2,083 is less than rental $2,500
The total interest costs is now paid for completely by the tenant. This is of course an over-simplied example as we are putting in quite a number of assumptions:
- The Tans have the funds for downpayment of for the 2ndproperty
- Both husband and wife have much higher income now to qualify for a bigger loan on their own and they have the cashflow to meet a higher combined monthly repayment of $6,323 (additional $2,529 more every month due to the new purchase loan)
- The investment property is highly-lettable with no or minimal vacancy periods between leases
- There is minimal unexpected “holding costs” they will incur which erodes the yield for example repairs, contributon to sinking funds, etc.
(Note: In this example we are ignoring the usual transactions costs like normal 3% buyer’s stamp duty, agent’s commission, legal fees, etc. as we are not calculating net investment yield. We are not getting into discussion on capital gains from asset appreciation over time hence we ignore the return of investment for deploying funds toward downpayment of 2ndproperty)
For this strategy to work, the key is the ability to achieve consistent rental income and for mortgage interest not to skyrocket so high like above 5% for long periods which then means they will need to “top up” and pay interests as the rent per se will not be sufficient to cover the interest-portion completely. Having the cashflow to sustain through such high-interest periods, if it happens, will be vital failing which they will need to dispose of the asset sometimes at a loss.
Still, you get the idea behind this – we always advocate property investment as a form of disciplined savings where the tenants help to pay for the property over the course of the loan. Over the long term, investment property may be the best way to reduce interest costs as someone else helps to pay for it.
Incidentally, there are ways to get more loan from the banks based on assets including stocks and bonds instead of just income earned. Speak to our consultants who can calculate the maximum loan for a new purchase loan or AIP (approval in principle) for you or your spouse.
5. Work With A Trusted Mortgage Consultant
Buying a second property for rental income may not work for everyone. Seeking out a trusted professional mortgage consultant whom one could work with long term is what every homeowner could do and should.
Not only does having a personal mortgage broker saves one time in doing home loan comparison, it actually saves money when there are timely reminder calls to review the mortgage ahead of lock-in expiry date. A good mortgage consultant would also be able to track developments in the industry including interest rate hikes by the various banks over time to aid clients in making the most informed decision, not to mention navigating the ever-changing regulatory framework on home loans.
We hope the fire ways outlined in this article will benefit you in saving real money, or at the very least let you see mortgage planning and management in a new light. Contact us now to start saving on interest costs from today!
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements. We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals. That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us. Read our clients’ testimonials.