(F) man deep in thoughts on which mortgage bank to pick

8 Questions To Ask Before You Refinance

Many homeowners will be reviewing their mortgage rates and rightly so with SIBOR dropping to historical lows in 2020.  This article will serve as a useful check list of questions before you sign on that dotted line.  It may take longer than usual to read, but we certainly make sure it’s worth your time.

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1. How early should I start to review my mortgage rate?

Unknown to most, you can start as early as 6 months before the expiry of your lock-in.  This is because should you decide to refinance, the new bank will typically provide a 6-month availability period (from the date of acceptance) for you to draw down on the loan.

Being able to start early in the review process is usually beneficial through both the up and down interest rate cycle.  In periods when interest rates are going up, this allows you to lock down the rising fixed rates.  In a less obvious manner, reviewing early during periods when interest rates are falling like in 2019/2020 also allows you to lock down the rising “spreads” on floating SIBOR loans.  As interbank rate dips, banks will fall head over heels to jack up the spreads in order to protect their margins.  This is what we have witnessed since the beginning of the year where SIBOR spreads have risen from 0.15% to 0.85% right now, even as 3-month SIBOR dipped from 1.77% to 0.44% (as of 13-July).

2. Should I refinance or simply reprice with my current bank?

Reprice may seem the route of least effort and a natural choice.  However, if you do not at least put in some efforts to check around, you might just shortchange yourself.  I’m sure many of us would have experienced some degree of outrage or even disgust when you sign up for a new telco plan or a credit card or bought a new car, only to find even better promotions the following month.  The fact is almost all businesses are measured by new signups or acquisition targets.  Existing or renewal customers are often told they do not enjoy the same perks or discounts reserved only for new customers.  So much for customer loyalty.

There are of course exceptions.  But to get the very best in all things as a consumer  – I say embrace free market competition and be very willing to switch.  It may take some efforts to dig through income documents but the payoff is often worthwhile as there are substantial savings over time.  Many banks have also gone fully digital in the process as a result of covid-19, which makes it much easier to refinance.

3. Should I talk to the banks direct or use a mortgage broker?

It may sound self-serving here.  That’s precisely why we listed the two most important questions above.  If you like to be reminded at the earliest possible time to do a mortgage review; if you want to be able to navigate through the myriad of home loan packages where rates can change in a flicker; you should use the service of a mortgage broker.

Many may not have heard of a mortgage broker or still think that the costs of providing such a free service must be loaded onto their interest rate.  On the contrary, we have witnessed many who signed much lousier rates earlier when they speak to banks direct.  This is because mortgage specialists in banks are just sales people who earn commissions on various home loan packages where not all packages are paid the same.  They are also more of a one-time transactor as they do not handle repricing typically and can only sell you products from one lender.

When you work with mortgage brokers like us, the bankers we work with may earn less in commissions (as there’s another party to pay), but they are more than happy to get volume business from us.  More importantly, we are mindful to always give you the right advice across all packages and all banks as our business continuity depends on repeat business and referrals.

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4. Where are we now in the interest rate cycle?

The best way to predict interest rate directions is to look to and monitor US Fed action, which is what we do closely here.  When the Fed embarks on a sustained tightening path, you can bet that SIBOR (Singapore Interbank Offer Rate) will rise correspondingly as there is strong correlation between SIBOR and the fed funds rate.  Likewise, when Fed turns accommodative, SIBOR will cascade down.

With covid-19, both fed funds and SIBOR have crashed in 2020 and are not expected to recover in the next few years.  It’s important to know where are we now in the interest rate cycle as that provides answers to the next two pertinent questions.

5. Should I go for fixed or floating rate?

After being in business since 2014 and having gone through a full interest rate cycle of Fed rate hikes from 2015 (Dec) to 2018, followed by rate bust from 2019 to 2020, this sums up our observation – there’s usually only a brief period of 2-3 years when it makes sense to go fixed, outside of that period it usually turns out better to be on floating rate.  This is especially true in the era after the 2008 Great Financial Crisis where cheap money has flooded the global markets leading to demise of yields and inflation of asset prices all over the world.

We have seen too many examples of people who overpaid on fixed rates especially the longer 3 to 5-year fixed when they realized (with a heavy price to pay) that rates never really rise up as much in the end. 

6. Which mortgage peg should I choose?

In the Singapore market, there are generally four types of pegs where all mortgage rates are linked with – SIBOR, SORA, BOARD or deposit rates we call FDR.  We always favour SIBOR or a market-controlled index when interest rates are going down.  Taking any home loans pegged to BOARD or FDR is akin to a fixed rate for as long as the bank decides not to adjust the peg – your rate will never drop or come down as much as the broad market. 

On the other hand, when interest rates rise, we tend to favour first and foremost fixed rates, followed by home loans pegged to 3-month SIBOR or FDR.  BOARD is controlled by the bank which may not be transparent in how it makes any adjustment.  FDR, though also controlled by the bank, is at least published on the bank’s website and open to more scrutiny.

OCBC has just started to use SORA (Singapore Overnight Rate Average) to price home loans which is also a market-driven index for mortgages.

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7. Will there be any likelihood of selling or doing partial prepayment within the lock-in period?

This is important as almost all home loans in Singapore come with a lock-in period of minimum two years be it fixed or floating.  If there are plans to sell or pay down partially on the loan, there are home loans that come with waiver of the 1.5% penalty due to sale or prepayment within the lock-in period.

There are also interest offset home loans in the market where it allows you to “prepay” without actually prepaying.  Which means that you can access those funds again if need be, for example to do an investment, without the need to apply for equity term loan on the property.

8. Are there any hidden costs or clauses I should be wary of?

One of the most overlooked factor in choosing a home loan is the interest rate in the 3rd year.  You may be out of a 2-year lock-in, but you will be asked to pay back the legal subsidies or cash rebate given to you at the outset should you choose refinance home loan out to another bank in the 3rd year.  This is called a clawback.

That’s why on our website and in our Rates Report, we always look at the average interest rate over a 3-year period.  Of course, you can always seek to reprice the loan in the 3rd year but you are in a less favourable position to bargain.  The repricing bank could also choose not to waive or reduce the conversion fee involved.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals.  So, be it to refinance home loan, buy your next Singapore condo or even review your commercial property loan, speak to our dedicated team of mortgage consultants here for the best Singapore home loan rates.

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