8 Pertinent Questions On Refinancing

From time to time we do an overview of the questions to ask on refinancing to help homeowners who are new to mortgage planning.  This would also serve as useful reminder for those who have refinanced before but may have skipped a step or two and missed some benefits.

This may be a long article but we’ll make it worth your time.  Let’s jump right into it.

1. When can you start to review your home loan?

Unknown to many, you can already sign on the dotted line to lock down a good interest rate as early as six months before the expiry of your lock-in period.  This is because the new bank will normally allow you to bring over the mortgage within a 6-month Availability Period from the date of the LO (letter of offer).

If you think rates are creeping up, especially those who want to lock down the all-time historical low fixed rates at the moment (as low as 1.12%), this becomes an important knowledge.

In other words, those with lock-in expiring up till November could start this review now.  Speak to our team here at MortgageWise if you are unsure how to do this.

2. Is it better to go direct or through a mortgage broker?

This may sound self-serving but we still have to answer this all-important question and let you verify the facts yourself.

Without going overboard, the benefits of using a mortgage broker are best summarized as follows:

• Convenience of comparing all mortgage packages from the 12 major lenders in Singapore all at-one-glance (and updated).
• Access the resource and network of an established mortgage broker with a proven track record over time – that way you get to work with the best advisor, the most competent banker, and a reliable & service-minded conveyancing law firm.  Rather than leaving it to chance by calling a bank’s hotline and having to learn and unlearn each time you refinance.
• Additional benefits from the broker, on top of the usual cash rebate or legal subsidy given by the bank.  And need I say this – all for the same interest rate package had you apply to the bank direct!  You can validate this.

On this last point, fair to say there are times when some banks might choose to offer slightly lower “direct-to-bank” interest rates.  This is when working with the right mortgage broker partner matters – we’ll tell you so at MortgageWise (can’t say the same for other brokers).  And trust me there are more than a handful of banks offering that right now.  We tell you because we believe in the long run, banks who offer “direct rates” will lose out in this fierce battle for a bigger slice of Singapore’s competitive mortgage market.  The jury is still out.

3. Which mortgage loan peg is best?

There are more banks offering SORA (Singapore Overnight Rate Average) – first OCBC & UOB home loans, as well as now Standard Chartered and DBS home loans.  As SORA will replace SIBOR (phased out after 2024) as the only market-based mortgage peg, it’s important we understand it.  We did a write-up to give the lowdowns on what is Compounded SORA and how it works.

We still maintain the view that interest rate might go two steps forward and three steps back, ie. sideways.  However, when Fed finally hikes rate again be it 2022 or 2023, FDR home loans (pegged to bank’s fixed deposit rates for example DBS FHR) might once again gain traction.  SORA will lose its appeal during interest rate upswing just like in the past cycles.  Most people will just switch to fixed rate home loans which bring us to the next question.

You can already sign on the dotted line to lock down a good interest rate as early as six months before the expiry of your lock-in period.

4. Is it better to go fixed or floating?

The current trend is fixed rate, especially when it is at decade-lows.  To go fixed or floating is part of a huge debate right now on the path of inflation.  The best way to keep track is to follow financial markets especially Fed policy.  Otherwise you are probably better off getting expert advice from a mortgage professional.

At MortgageWise, we based our recommendations on which point are we at in the interest rate cycle.

Though the trend is towards fixed, we think there remains the prospect of a largely subdued floating rate in the next two years (until Fed’s sustained rate hikes).  The best time to switch to fixed is when that inflection point is reached.  Speak to our consultants if unsure, as well as six other considerations you need to look at before deciding on fixed vs floating.

5. Would you be selling or buying property anytime soon?

Some people are not aware that a number of banks now waive the typical 1.50% penalty when you redeem a loan due to sale of property during the lock-in period.  This usually applies for floating rate home loans but there are also some aggressive lenders who waive this even for fixed rate mortgages – yes, you can lock down a fixed rate mortgage and still sell.  That way, you maximize your sales proceeds.  Check with us for details.

What about those thinking of buying a second property for investment income? With ABSD becoming a permanent costs now in Singapore’s property market, we are definitely seeing an uptrend over the years where more couples come to us to do property decoupling. And what better time to do that while you refinance the home loan.

6. Do you want to make prepayments annually to lower your debt?

One of the sure-fire ways to reduce interest cost, as we have shared in one past article, is to make repayments every year.  This discipline reduces the outstanding balance every year which saves you a lot more than that few basis points difference when you compare interest rates between banks.

There are many packages which allow you to make repayment during the lock-in period without incurring any penalty on the amount redeemed.

Yes, you can lock down a fixed rate mortgage and still sell!

7. How do you see your job situation or income stability?

In an uncertain post-covid world, this may become a more salient question than before.  If you foresee headwinds in your industry where your income may be disrupted, whether voluntary or involuntary, it may be wise to go for a floating rate home loan where the thereafter rate (after the initial 2-3 promotional years) does not step up.  This allows you to continue on the same plan as it might be tricky to refinance or even reprice later without a regular income.  For example, you may decide to take the plunge into starting your own business?

In fact, some may want to take the opportunity while they refinance to do a gear up loan in the form of an equity term loan. This is more applicable for private property owners with a single mortgage which has been paid down substantially over the years as they have purchased the property many years ago. The extra cash may now come in helpful be it for business start-ups, children’s education, etc. All the more so when you can finance it with such low borrowing costs today! And it’s good to take up a term loan at the same time while you refinance the housing loan so that the lock-in periods will expire at the same time.

8. What are the costs involved and ways to minimize it?

First, some people are still unaware.  In Singapore’s context unlike in countries for example UK and Australia, our services as a mortgage broker are provided free.  This is because banks will pay us a referral fee and pay less commissions to the banker doing the loan.  It’s transparent to you.

For repricing, or switching to another package from your current bank, there’s usually a repricing or conversion fee charged which can range from $300-500.  Sometimes that can be waived especially if it’s written into your contract as one free conversion.  Otherwise, it makes more sense to refinance out where often the new bank who is hungrier for your business will provide subsidy for legal fees and valuation fees – the two main costs involved.  You end up not paying a single cent in transaction costs, yet getting a lower rate than your current bank!

How can you minimize the transaction costs? When you work with an established mortgage broker like us, we have ongoing rewards program where, for many years, clients have received FairPrice gift cards from us – not just for their own loan but each time when they refer their family members and close friends!  It’s just a small token of our appreciation for coming through us for the mortgage instead of going straight to the bank.  We also negotiated slightly better rates for your legal fees when you take the loan through us and use our partner law firms who have proven to be extremely reliable.  

You end up not paying a single cent in transaction costs, yet getting a lower rate than your current bank!

Understand that unlike other brokers, we do not compete on such rewards.  Rather, by now, I hope you see permeated through this entire website – the value-add that we provide in our content and advisory, and the level of integrity and honesty that we operate in this business, which have won us accolades throughout the last 7 years since 2014.  Support us and work with a trusted partner.

Compare Singapore home loan rates using a comprehensive, fast and free service from MortgageWise.sg, in operations since 2014.  Be it to refinance home loan, buy your next Singapore condo , or even explore commercial property loan, speak to our dedicated team of mortgage consultants at your service today!