With interest rate likely on its way up albeit at a gradual pace, it is important to review one’s mortgage costs on a regular basis. Most people do not realize that mortgage interests run up to hundreds of thousands of dollars over the entire tenure of the loan. Take for example a typical loan size of $700,000 over 25 years at 1.68%. Even if we assume that interest do not rise for 25 years which is near impossible, even though one services a repayment of only $2,860 a month, the total amount of interest paid at the end of the 25-year period adds up to $157,743. That is 23% of the original loan of $700,000! If the interest rate over the period is 3% instead (using a more realistic longer-term average), total interest costs go up to a staggering $295,843! Or 42% of your principal sum!
Therein lies the importance of regular mortgage review and refinancing to make sure that one always access the best deal in the market as soon as one is able to. Here’s eight questions to ask at every review:
1. How Early Should One Start To Review His Mortgage?
Most people come to us late for refinancning. The best time to start the process is four months before the expiry of your lock-in as one needs to serve a 3-month notice to redeem a loan. If interest starts to creep up slowly from 2018 onwards, it may even make sense to start the process earlier. Speak to our consultants to find out more how this can be done.
2. How Can One Fulfil TDSR Requirements?
TDSR (Total Debt Servicing Ratio) regulations stipulate that one’s total monthly debt should not be more than 60% of one’s total monthly qualified income, before one could refinance. However, in recent years there has been more exemptions given by the authorities on refinancing for owner-occupied homes, investment properties with DRP (debt reduction plan), and even equity term loan to help retirees monetize their assets. The issue is now more on bank’s internal credit policies which would still require TDSR not to go exceedingly higher than 80% to 100%.
Generally, there are less TDSR issues nowadays, however should there be a need to lower this ratio or to get additional term loan whilst refinancing, there are only two ways to do that – reduce the numerator (monthly debt) or increase the denominator (monthly qualified income). Make sure one has no other forms of borrowings and also very little credit card usage two months before applying for refinancing. For income, as most people have their bonuses paid out at the start of the year which is not captured in the latest IRAS Notice Of Assessment (NOA), it is good practice to always keep one’s payslip for up to 12 consecutive months as that can be admitted as income documents.
3. Should One Refinance, Or Simply Reprice?
We encourage all our clients to check with their existing lender for a repricing offer so that we can better evaluate if he should stay or switch out. The truth is – there is usually another lender out there more eager for new businesses, which is the beauty of free market. Banks always like to think that brokers are taking out their clients as much as they bring new clients to them. That is not true. We live in the digital age and in many aspects of our lives now decisions are made at click of a button. And when information is readily available with expert advice, the onus is on banks to take it upon themselves in giving the best deal to existing clients as much as they acquire new ones.
To this question I would say – it always pay to compare, and may I also add that one should never be resistant to moving just because of the documentations involved. It has become quite a breeze these days with digitalized government services and everything at the click of a button. It will get even more so with banks integrating with national registry databases. More importantly, remove the inertia and be always ready to switch mortgages to another lender in order to keep the free market mechanisms alive as less competition will ultimately lead to higher interests for all of us.
4. Going Direct Or Work With A Broker?
In the last five years, more Singaporeans are becoming familiar with the concept of a mortgage broker, akin to an insurance intermediary. I put this percentage at less than 10% five years ago and perhaps 40% now. Initial skeptism of using a middleman where people thought they would end up with a package at higher interest has given way to realization that professional mortgage consultants (advisory role) not only give better advice than talking to bankers (sales role), they do get the same if not better deals from banks plus additional perks from the broker himself due to economies of scale in operations. For example, MortgageWise clients do enjoy special legal fee privilege every time they refinance through us. Even for purchase now, they enjoy an unbeatable $1800 all-in private property purchase legal fee (usual terms apply).
Occasionally there may be some packages that lenders distribute directly on their website where no brokers are allowed. Here at MortgageWise, we do inform our clients about these packages but thankfully most of them do see from our analysis how these may not always be the best deal out there. Remember even though lenders cut out external brokers for certain packages, they end up paying the same distribution costs, just that more of it goes to their internal salesforce. Worst, they might now end up with lower volume of business.
5. Should One Go For Fixed Or Floating Rate Mortgage?
This has become the classic question of the last few years when we see SIBOR in Singapore roller-coaster up and down from 0.90 to 1.25. As the answer to this question is dynamic and dependent on economic growth and inflation, global events and developments coming out from US particularly Fed decisions, it is best that one speaks to a professional mortgage consultant who keeps a close watch.
There are also other salient factors to consider in this question like the gap between fixed and floating, the loan size, owner-occupied versus investment, ease of refinancing, and even the risk appetite which varies from person to person. There is no one-size-fits-all.
Perhaps one good way out of this is to use our proprietary MortgageWise Interest Simulator which gives the closest estimate of one’s potential interest savings through sensitivity analysis on a set of reasonable assumptions as to how interest will rise up over the next three years.
6. Are There Any Interesting Loan Features Worth Looking At?
Certainly. From combo loans, interest-offset accounts, flexibility to prepay without penalty, waiver of penalty due to sale, to complimentary Priority Banking status upgrade based on loan size instead of AUM (assets under management), lenders in Singapore have been pulling out all stops to attract and retain a mortgage client. After all, mortgage is still one of the most lucrative business for banks in a property-crazy island country where everyone wants to buy one more property, no one wants to default on a home loan, and where banks can easily dispose of any foreclosed assets through auction, and at good prices.
Like what I have mentioned earlier, rates per se may not be the only factor to look at especially when banks tend to match one another in the first few years of the loan. Speak to our consultants who can tell you much more than bankers what else is there to consider from the broad market.
7. What Are Some Hidden Costs In Refinancing?
There are two sets of costs in refinancing – legal fees which generally range from $2,000 to $2,300 for private property loans up to $3m, and valuation fees which range from $400 to $600 for private properties up to $2m in value.
Other not-so-upfront costs are things like legal fee clawback where banks ask a borrower to pay back in full the legal fee subsidy or cash rebate given should one refinances out within a 3-year period, even though the lock-in period for the loan can be two years only. This means that in the third year, even though the borrower could refinance out without any penalty on the loan, he would still prefer to stay for at least one more year to avoid paying back this subsidy of $2,000 (for most cases). Knowing this, lenders would usually not waive off any repricing admin fee usually $800 or more.
8. Is There Anything Else One Should Look Out For?
Finally, I always touch on the issue of lock-ins when I write on this topic as this is one area overlooked by most borrowers who would gladly signed on the loan contract with a two-year lock-in period in exchange for a low interest without giving due consideration to what it means.
Lock-in means one loses the flexibility to prepay on the outstanding loan be it in partial or in full, refinance the loan to another bank for a lower rate, or even sell the property, without having to incur a hefty penalty of 1.5% of the loan amount. The typical lock-in period now is two years but there are some banks providing leeway for partial repayment, even total redemption of the loan due to sale during the lock-in. The latter is especially important as the property market seems to turn the corners with enbloc sales fever raging in recent months.
At end of the day, the best way to monetize a property is still to sell it for capital appreciation and put the profits into the next bigger play, even for owner-occupied homes. One will never know when a good offer may come or a decision to sell may suddenly be called upon in order to buy something better without incurring ABSD (additional buyer’s stamp duty). Reassess the likelihood of a sale, even on an enbloc nature for those staying in older properties, and some may just not want to lock themselves in for too long a period especially if the current craze prove short-lived.
At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements. We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal. We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.
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