interest rate hike by US Fed

Get Ready For Rate Hike In 2015

Rate Hike In 2015 Likely Earlier Now

We have started to sound our warning since last month rates might rise earlier than expected, though many think it is still a mixed bag of slowing growth in China and Japan going into mild recession, yet coinciding with news of sustained recovery in USA through 2014, Dow Jones to cross record 18,000 level soon, and oil prices plunging below USD70 per barrel and looking likely to stay down for 1st half of 2015.

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At MortgageWise we think the drop in gasoline prices is going to spur spending, plus the positive sentiments emanating from the year long recovery where we will finally see corporate profits translating to wage increases in 2015, something which the Fed has been waiting to see before they act.  The recovery in consumer confidence in US is going to be a big factor pulling Europe out of deflation as well as keeping China’s economic engine alive.  The positive spiral will be upwards.  The biggest risk to global recovery seems to be Euro woes which we will monitoring very closely from here.

If all the factors above are sustained and with winter arriving early this year leading to earlier recovery in both consumer as well as business spendings in 1st half of 2015, we expect to see the first rise in the US Federal Funds rate sometime in Q2 of next year.  Most expect this to be middle or 2nd half.

The good news is global growth will be accompanied by very slow rise in interest rates this time, thanks in a large part to the discovery of shale gas supply in US hence lowering energy prices as well as the shifting demographic profile of the humongous baby boomers generation all over the world.  Inflation will not reel its ugly head so quickly in this recovery as aging population will not spend as much as before.  Central banks will also not want to risk jeopardizing recovery after 5 years of pump-priming the economy.  So we expect rates to rise up mildly over the next 3 years.

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What does this mean for investors here in Singapore where we are price-takers as far as interest rate trending is concerned.  Our interbank market follows after the US.

Two immediate implications come to mind :

  • Take stock end of the year.  Do mortgage planning especially if you have two or more mortgages outstanding.  Remember the grace period given by MAS in Singapore for investors to be exempted from 60% TDSR requirement expires Jun2017.  That is 2½ years away and if we were right in our forecast barring another Great Recession, prevailing rates will be moderately high by then.
  • With impending rate hike it will be most appropriate to consider moving to fixed rate packages sometime towards end of 2015 just when rate are on its way up.  There may still be a small window for some to refinance 2 times to take advantage of the historical low rate now, if you act fast.

The 3-month Singapore Interbank Offer Rate (sibor) where most loans are pegged to has already moved up from 0.40% p.a. three months ago and now testing the 0.43% p.a. level.

We have also heard some local banks, wary of the likely rise in NPLs (non-performing loans) next year with continue decline in property prices, is going to increase their margins or spreads on loans.  Be forewarned here, all banks one by one is going to come out with new packages when we come back in Jan to start off the new financial year.

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For those who still want to take advantage of the historical low rates and lock in say a fixed rate mortgage of 1.41% p.a. (this package expires on 15 Dec 2014) the time to act is now.

Look out for our next and last article for the year where we will be sharing specifically what to do and explain how to do an assessment of your current TDSR ratio.

Sign up to our newsletters to receive blurps on interest rate movements and analysis for better mortgage planning. Speak to our experienced mortgage brokers today who can assist you with the right roadmap and decision for refinancing of your existing home loans amist all the latest TDSR and LTV guidelines.

 

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What Now That QE3 Has Officially Ended

Expect Rate Rise Earlier Than Expected

 

As most are aware QE3 has officially ended last month.  And in a surprising more hawkish tone in its statement following US Fed latest meeting last month, it highlighted “substantial improvement” in the jobs outlook and underlying strength in the broader economy with inflation being held down by lower energy prices.

 

Most analysts still expect rate rise to begin sometime in the middle of 2015 with Fed keeping to its language that it will keep rates low for a considerable time.

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Here at MortgageWise, we think that a lot depends on the labour market statistics over the next few months which we will be watching closely for you.   With stock market surviving the mini scare in jittery October month and with most Wall Street (76%) reporting profits for 3rd quarter that has shot pass expectations, it does seem that labour market will tighten further leading to likely earlier rate revision than expected.

 

Japan’s surprised stimulus along with more aggressive measures from ECB will likely also bolster global market sentiments as we near the traditional feel-good end of the year period.

 

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US Economy – Unemployment Down To 5.9%

Interest Rate Hike Mid-2015 Likely

The US Bureau of Labour Statistics just released the latest job data for September 2014 where the official unemployment rate has not dropped below 6% for the first time to 5.9%, renewing optimism that the recovery is firmly on track. It reported strong job growth of 248,000 fresh jobs created rebounding from the dismal figures in August which has been revised to 180,000. July’s figure was 243,000.

However as recent reports have suggested, Fed officials are now moving away from basing its assessment of the health of labour market on a single unemployment rate per se as wages growth has been stagnating and labour participation rate is still running low which is once again borne out by the latest numbers where at 62.7% it is the lowest level since Feb 1978.

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The latest numbers though largely positive is unlikely to change the Fed’s current stance on interest rate policy which will continue to stay low for a considerable period after the last bond purchases as part of QE3 ending this month. We have to wait for further cues from the next FOMC meeting.

At MortgageWise we believe the first interest rate hike will be sometime middle of 2015 should the current US recovery be sustained into the new year, notwithstanding Eurozone going into a recession.

Sign up to our newsletters to receive blurps on interest rate movements and analysis for better mortgage planning. Speak to our experienced mortgage brokers today who can assist you with the right roadmap and decision for refinancing of your existing home loans amist all the latest TDSR and LTV guidelines.

 

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Mortgage Planning – What To Do Before 2017?

Refinance Or Sell Before June 2017?

In the announcement earlier in the year 10 Feb 2014 where MAS broadens the exemption for TDSR (Total Debt Servcing Ratio), it allows investors a “transaction period” from now to 30 June 2017 to refinance the home loan for their investment property notwithstanding them having exceeded the TDSR ratio of 60% subject to a few conditions :

  • The investment property was purchased before 29 June 2013 (otherwise TDSR would have been in place and they will unlikely be granted a loan above 60% TDSR to buy in the first place)
  • They commit to a debt reduction plan with the bank (at this point this might mean paying off a small portion of the outstanding loan to be refinanced like 3% etc)
  • They pass the bank’s credit assessment

 

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For owner-occupation homes, the exemption from fulfilling TDSR is evergreen – there is no expiry on that and borrowers can sleep soundly knowing they can refinance every 3 years just like in the past, no change.

However for investment property why is there this grace period?

Obviously the thinking behind the central bank’s policy here must be to get everyone to pare down their total debt obligations until it stays within the limit of 60% TDSR at some point.   After all TDSR is a structural change and here to stay for good.

For someone who is already overstretching by this definition having to service for example multiple home loans where all the instalments add up to more than 60% of his monthy income, what are some ways he could slowly reduce his exposure over the next 3 years?

(a)  Sell At Least One Property

The most obvious option. And at MortgageWise we have been advising our clients with more than 2 or 3 mortgages to seriously look at selling at least one of those investment properties especially when :

  • They bought it years ago and the property is still sitting on solid profits despite the generally softer real estate market in 2014.
  • There is still a huge outstanding loan like above 60% Loan-To-Value which will be highly susceptible to the double whammy effect of a rising interest and declining rental yield, a scenario that looks more and more likely now..

Doing this step successfully will bring down a big chunk of debt immediately (TDSR below 60%) allowing one to refinance all the other remaining mortgages. 

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(b)  Be Prepared To Move

Sometimes it is not so easy to sell one of the big ticket property especially in a depressed market like now. Also it may not do justice to one’s overall investment strategy which is to hold and ride out property market cycles and sell the big floorplate unit or luxury property when the market peaks again.

Also with TDSR here to stay, it will be difficult to go back to those days where one can leverage to the maximum 80% for every property purchased over time thereby building up an impressive real estate portfolio for retirement whilst tenants help to pay down the loan for the time being. In other words, selling may be an easy option, but buying back becomes impossible without leverage, even after ABSD has been removed at some stage.

Consider then the very real possibility of moving into such a unit and make that into an owner-occupation property where you can refinance the same way like in the past. Yes to some it may also mean sacrificing a higher rental cashflow. Do your sums and you might achieve higher rental psf on a smaller unit which is also more lettable going forward where many tenant’s budget are cut in the midst of housing over supply.

(c)   Two Chances To Refinance

As we are now about 2.5 years away to 30 June 2017, it means there is likely just one or at most two more refinancing opportunities on MAS exemption of a debt reduction plan with the bank. Plan ahead and make clever use of these two final refinancing opportunities. For example with rates still low, you might want to stay nimble and refinance first to a floating rate package that allows you to reap benefits of low rate, yet with no lockin or maximum 2 years lockin so that you can still do a final refinancing just before June 2017 to a fixed rate package when the rates are finally on its way up.

Try speak to experienced and strategic-minded mortgage planners who can assist you with the right decision and roadmap as refinancing and leverge becomes more complex in Singapore. Talk to us now.

 

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US Federal Reserve FOMC

QE3 Ends In October

US Quantitative Easing 3 Ends In October

By now you would have known the outcome of September’s FOMC meeting last week with Janet Yellen confirming that QE3 is ending with final purchase of US$15b of bonds next month.  What’s next?

The official statement released was that “rates would remain extraordinarily low for a considerable time” and “although US economic expansion has continued since the last FOMC meeting in July there is still lingering concerns on the underutilisation of labour”.

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At MortgageWise, we interpret the latest Fed statement to be mostly ambivalent, inconclusive and in fact almost a non-event as what they are basically saying is there is no change in policy since the last meeting, and whether rate hikes will happen sooner or later part of 2015 depends on how the market reacts after tapering ends next month.  Everyone knows that.

The only indication that Fed may now be more hawkish (or leaning towards rate hike) this round was the revision of the Board’s own forecast of the Fed funds rate by end of 2015 to 1.375% instead of the earlier 1.125% forecast in June.

Going by the latest inflation data in August where the CPI actually fall for the first time this year, understandably we think Fed is not in any hurry to hike rates which carries a greater risk of sabotaging the recovery than to maintain the current “wait-and-see” policy for a while longer.

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Remember that European central bank is starting on their QE next month as well.  And together with Japan which continues to flood the market with cheap money, it is hard to tell which way it will go.

Many still believe that the current recession in EU will have an effect on US recovery and the picture will become clearer in the coming months.

We maintain our view that interest rate hike is more likely to happen in 2nd half of 2015 given all the uncertainties.

 

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How To Select Home Loan – Tenure And LTV

Tenure And Loan-To-Value (LTV)

The final step in this 5-step process of loan selection looks at decisions on how much and for how long, ie. loan quantum and tenure.

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To summarize the 5 steps before we go on:

  1. Interest Rate
  2. Loan Restrictions (eg. lock-in period, prepayment penalty etc.)
  3. Special Features (eg. interest offset account, switching between sibor periods etc)?
  4. Personal Considerations
  5. Tenure and Loan-to-Value (LTV)

To be more precise, tenure and loan quantum are not exactly factors you consider when choosing which bank’s loan package to go for.  Tenure might be a decision factor in the past as different banks might use different yardstick to assess what is the “average age” for the applicant when there are 2 borrowers typically husband and wife and where there is quite an age gap.  Some banks will take the age of the younger borrower resulting in a longer loan tenure and hence lower monthly repayment.  Others will use the average age of the two.  However these idiosyncratic practices have stopped since 29 June 2013 when MAS introduced the income-weighted average age as a uniform assessment policy the same time it rolled out TDSR.  All banks will need to comply and use the new measure so you will get the same tenure no matter which bank you go to.

Nonetheless tenure and loan quantum are still important decisions affecting your loan repayment and warrants a separate discussion per se.

(a)  Tenure

In Singapore most people tend to like to stretch the loan over the maximum period possible.  Some of you might recall UOB promoting a 50-year loan tenure as a selling point few years ago.

Recognising the excessive interest one pays over a long tenure and how some people ultimately over-stretch themselves by taking on more than a few mortgages by paring down the monthly instalments through longer tenures, MAS has since last year capped the maximum tenure at 35 years for private property loans and 30 years for HDB.  Furthermore if your loan goes pass 30 years or age 65 you will be “penalized” with a lower LTV (loan-to-value) covered in the next section.  All these to discourage people from taking too long a tenure.

As a general rule of thumb, anything in the 20-25 year range is good as one will be able to fully pay down his mortgage before age 65 where you need the rental as passive income to retire on, instead of paying the bank.  Remember the longer your tenure the more interest you will pay over the long run.  For an owner-occupied home, your main aim will be to try and pay down the loan as quickly as you can to save on interest costs (which makes the bank rich) so go 20 years or lesser as long you are confident to service the higher instalment that comes with a shorter tenure.

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For investment property where you rent out, this might take on a different strategy for some.  Typically investors waiting out a property cycle in order to make a decent capital gain on their assets will want to minimize their property holding costs so that the rentals which fluctuate from time to time will be able to cover their loan instalments.  That way there is no “cash out” from their pockets.  Thus it is not unusual for them to go for longer tenures but still the new 35 year loan cap applies.  Some investors with existing 40-year loan tenure will have to think hard about refinancing as their monthly instalments will suddenly shoot up with a shortened tenure.  Some joint-borrowers with a big age gap might also face similar plight due to the income-weighted average age as highlighted earlier.

One piece of good news here though is some concessions given earlier this year in Feb 2014 where MAS allowed mortgages on owner-occupied homes only to keep to their existing tenure on refinancing even if it goes beyond 30 or 35 years respectively for HDB or private properties.  The maximum loan tenure allowed for all refinancing cases will be computed from the date of the original loan.

(b)  Loan-To-Value 

Loan to value measures how much loan as a ratio of its current valuation which is why most borrowers will need to pay a small fee for a valuation report when taking up a home loan be it for new purchase or refinancing.  There are limits set by the authorities now that govern how much you can loan.

The LTV limits announced by MAS back in 12Jan 2013 applies to loans for new purchases :

LTV limits by MAS for new property purchases

In a nutshell, people with at least one existing mortgage loan which is the majority of us, will get their LTV cut drastically when they take up a 2nd (50%) or 3rd (40%) property loan for their next purchase.  This will be further reduced to 30% and 20% respectively if the loan goes past 30 years or 65 years old.  In the latter case, take for example someone age 55 who buys his third property and takes up a 3rd mortgage loan of 15 years going past 65 years old, he can only borrow 20% of the valuation of the property, ie. he needs to pay down in cash 80%! Nobody does that for property investment which is effectively the reverse of leverage – put down 20% deposit and borrow the rest so you get a 5 times leverage on returns.

However the above LTV limits do not apply for the case of refinancing which most banks will still offer LTV of up to 80% of the property value for sole mortgage and 60% for 2nd mortgage onwards, subject to meeting of TDSR .  Therein lies a loophole where one can try to stretch for maximum loan during his property purchase by first keeping his tenure not beyond 65 years old (ie.50% loan for 2nd property instead of 30%), pays a higher monthly instalment but only for a few months, picks a loan package with no lock-in so that he can immediately do a refinance and now stretch his tenure longer to bring down his monthly instalment.

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When it comes to loan quantum in Singapore, your wish to get maximum leverage might be curtailed by the law.  Looking at it positively, taking a lower loan quantum will likely allow you to pay off your monthly instalment entirely from the rentals and you pay the bank lower interest in the long run.

On loan quantum, one final note for those who have been servicing your mortgage diligently over the years, do note that you may not be able to refinance your loan when your outstanding goes below the minimum loan size (usually $100,000) required by most banks in Singapore.  This means that in your final stretch of the tenure, you may want to choose every carefully the bank you refinance to and make sure you get one with a good long-term rate that will see you out till the end of the tenure, or simply be prepared to redeem the loan in full if interest rises.

Consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.

 

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How To Select Home Loan – Personal Considerations

Personal Considerations

The next step in the 5-step process (below) is to look at some personal considerations when choosing the bank.

  1. Interest Rate
  2. Loan Restrictions (eg. lock-in period, prepayment penalty etc.)
  3. Special Features (eg. interest offset account, switching between sibor periods etc)?
  4. Personal Considerations
  5. Tenure and Loan-to-Value (LTV)

What are some typical personal considerations which may influence your choice of bank?  We identify four more common areas:

(a)  Relationship With The Bank

Maybe you are a private banking customer of the bank and your bank has a mortgage arm and they could offer you an attractive rate as part of your total banking relationship.  You will also have the dedicated service of your private banker who provides “under one roof” service for all your banking and investment needs.  Still, we do encourage you to keep abreast of market rates so as to ensure you are always getting the best deal.  After all private bankers do represent their bank and are known to peddle products and services in order to meet their sales target.

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Maybe you are a businessman and you do have extensive banking relationship with one bank in terms of your credit facilities and you are asked to support the bank in return.  To be honest we do not know how this exactly works.  We know local banks command the lion’s share of the mortgage business in Singapore and we also notice how over time some banks may offer better terms to new customers than existing ones.  That is a common grouse I hear from our clients and this is also why here at MortgageWise we deliver the most value in terms of comparing loans and ensuring our clients always get the best deal out there for mortgage loans, be it their current bank or another.

(b)  Your Credit Standing

Perhaps for some reasons you have not been paying your last few instalments on time.  Incidentally that is a very serious “red flag” for most banks and will surely hit your credit assessment.  Do ensure you have a near perfect payment history going by your latest CBS (Credit Bureau Singapore) report which you can pay a small fee ($6.42) to request for one directly with them here.

There will be a credit score at the end of the report with a risk grading going by type AA, BB, CC to HH.  Banks would love to see AA risk grade (score of 1911-2000) which basically means payments on all debts were current with no late payment history and no cash advance withdrawal in the past 12 months, and a probability of a default at less than 0.27%.  Contrast that with the worst possible credit score of 1000-1723 and a risk grade of HH with a probability of default at more than 3.48%.  For such cases, it is almost guaranteed that no banks in Singapore will approve any sort of loan application and such a person is better off making efforts to first improve his credit or payment history in the next 1 year before re-applying for mortgage loans.

If your credit profile is not very strong or is borderline case (eg. a CC grade), try not to apply to too many banks in a short time as each application shows up in the CBS report which will not give a good impression.  Pick the right bank to apply to with the help of a good mortgage broker and just be prepared the bank may ask you to show proof of funds.

(c)   Mortgage Planning

MAS announced new LTV (loan-to-value) limits for new property purchases on 12 Jan 2013 last year as part of property cooling measures where ABSD (additional buyer’s stamp duty) were also raised for locals and foreigners alike.

This will now be factored in as part of mortgage planning when you speak to a good mortgage broker who is well-versed with the latest regulations.  What it means for most people is to look at future plans for property sale and purchases carefully and wherever possible try to be “nimble” and put yourself in the best position to buy when the market crash again.  For many couples who are used to holding property assets in joint-tenancy in two names, increasingly we notice a trend where they might choose to “decouple” either on the title or mortgage or both when they refinance.

“Decoupling” on the title of the property by way of either a gift or a part-sale from one owner to another is a topic in itself and will not be covered here.  Suffice to say stamp duties are payable and owners will need to do precise calculations to see if doing so will indeed save them money in terms of stamp duties and ABSD.  Decoupling on the mortgage is easier to execute.  This is frequently referred to as “2M and 1B” in the industry, ie. two mortgagor but 1 borrower.  The mortgagor or owner whose name is not listed as a borrower in the loan will need to sign a consent letter to the bank.  A couple with only one property in Singapore and who does a “decoupling” on mortgage when they refinance (provided the remaining owner say the husband is able to fulfil TSDR requirements on his own) effectively “frees up” one owner or the wife to get maximum loan for a 2nd property as this will be then be her first mortgage (up to 80% LTV) subject to TDSR.

However note not all banks will accept this.  Some will require all mortgagors to be borrowers in the loan.  Again a good and experienced mortgage broker will be able to advise you which bank to go to.

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(d)  Your Future Income

Lastly you might need to consider the stability of your future income when choosing your home loan.

For those with a solid corporate career path where employment income is stable for the foreseeable future you have less concerns on refinancing and you could simply choose the bank with lowest average interest rate in the first 3 years and always refinance to the next best package after that.

However for those making mid-life career change, or those with highly variable income source eg.commission-based agents, it will be more important to look at the longer term rate beyond just the promotional rate in the first 3 years of the loan.  This is because after 3 years you may not be able to refinance with ease should interest rate shoot up and you are stuck with a higher interest spread of 1.25% or maybe even 1.5% and that is where the bank earns back from you higher margins.

At MortgageWise, we have advised some of our lucky customers who have been given incredibly “superb” spreads from banks of only 0.75% for “infinity” or the entire tenure of the loan 5 years ago not to refinance.  Even if this spread goes up to 1% after 3 years we have also asked them to stay put with their existing banks instead of refinancing now for their own good.  We get no business that way but it is the right thing to do as we seek to advise our clients by putting their interests first.  The moment they refinance to a new loan yes they may get slightly lower promotional rates again for the first 3 years, but their long term spread goes up to 1.25% after that and they would be shortchanging themselves in the long run.

Consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there. See their testimonials.

 

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How To Select Home Loan – Special Features

Special Features

Now we go to step 3 in the 5-step process by looking at any special unique features offered by the bank.

Once again to recap the 5 steps for choosing a home loan are:

  1. Interest Rate
  2. Loan Restrictions (eg. lock-in period, prepayment penalty etc.)
  3. Special Features (eg. interest offset account, switching between sibor periods etc)?
  4. Personal Considerations
  5. Tenure and Loan-to-Value (LTV)

Besides the interest rate, banks do offer various interesting features in Singapore to entice customers to sign up with their loan package, some of these are intrinsic to the loan itself, others some kind of bundling with other products and services with the bank.  Let us take a look at some of the more meaningful ones we think you might like to consider on top of interest rates.

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Before we go on, do note that the information given here may have changed or become obsolete by the time you read this blog post.  Bank packages and loan features are subject to review and change sometimes products are canned.  The information is accurate at time of writing this post which is in September 2014.

(a)  Interest Offset Account

Not all banks offer this.  DBS used to offer it but has since stopped.  The only bank marketing this as a selling point at the moment is Stanchart, called MortgageOne account, but it is only available for private property loans, not applicable to HDB.

The concept is simple.  The bank will pay you the same interest rate as your mortgage rate, on two-thirds of the deposits that you park in this MortgageOne account, capped at your outstanding mortgage loan.  The deposit interests earned will automatically be used to offset against the interest on your mortgage loan with any excess going towards reducing your principle.

interest offset mortgage account with stanchart

To illustrate with an example above, for someone who choose to loan $600,000 even though he has cash savings on hand of half of this amount $300,000, after interest offset the total mortgage interest costs is reduced by 35%!

Technically what this also means is that suppose you have $750,000 cash to invest in a small studio apartment in a new launch condo, instead of paying down using your own cash, you could just put down 20% deposit or $150,000 and park the rest of $600,000 in a MortgageOne account and the use the loan of $600,000 to pay progressively over time.  As the bank pays you the same interest rate as your loan for up to 2/3 of your deposits, you are effectively borrowing and paying interest on $200,000 (1/3).

This feature is good for those who values liquidity and wish to park his funds while waiting for the right investment opportunity to show up like the next market crash!  It is also useful for those making major career changes in life and wish to apply for the maximum loan possible while still having drawing a high income but with no use for such big loan yet.

Other banks do offer similar feature as Stanchart’s MortgageOne but the loan may come at a higher interest rate than their normal packages which will not be wise.

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(b)  Priority Banking

If you are a private banking customer your bank will likely offer you some special mortgage rates provided they have consumer banking business in Singapore.  Otherwise you may also want to consider joining Priority Banking (PB) of some banks who offer preferential mortgage interest rate to their PB customers.  One good example here is ANZ in Singapore which currently offers a 10 basis point advantage to their PB customers over their public rate of Combo (ave of 3-month sibor and sor) + 1.05%.  PB customers’ spread is 0.95% instead of 1.05%.

Incidentally it makes a lot of sense to park some of your funds in foreign banks like ANZ, Maybank, CIMB, etc. which have consistently paid out much higher time deposit rates compared to local banks.  This is because foreign banks, with fewer branches and limited access to market, need to attract more “sticky” deposits for their funding needs instead of just relying on interbank money market.

If you also work in financial district or CBD area one added perk here will be the exclusive use of PB lounges during lunch hour coffee breaks.

(c)   Free Switching Of Sibor Period

There is only one bank, Citibank, which offers customers unlimited and free switching between the various sibor interest periods from 1, 3, 6, 12 months anytime during the term of the loan.  How is this important feature for some?

The interest period simply means how often your loan interest is set or determined.  Though the sibor rates fluctuates daily in the interbank market, if you are on say 3-month sibor, once your rate is set it will be valid for the next 3 months before it gets reset again, notwithstanding daily fluctuations in the 3-month sibor rate.

In the interbank market, the 1-month sibor rate is always lower than 3-month which is lower than 6-month and so on.  It always costs more to lend to someone for a longer period just like the bank will have to pay you a higher rate when you “lend” to them your funds for a 12-month fixed deposits as opposed to a 3-month.

Due to this incremental spread in interests, it will seem logical for one to always opt for the shortest period of 1-month sibor as at any one point in time this will be the lowest rate.  The tradeoff is your rate gets reset every month instead of say every 3-month which means it becomes more elastic or responsive to any interest rate movements.  We think that in event of an interest rate hike over time, the net effect will be more or less the same as although your 3-month sibor is “fixed” for next 3 month, it will be reset or adjusted more in the next cycle.

Maybe the only slight advantage free switching between interest periods offers is that in event interest rate goes up too quickly in short span of time, one can opt to switch from a 1-month to 12-month sibor (slightly higher by 20 basis point) and hence “lock in” the interest rate for the next 1 year like a fixed rate loan.

(d)  POSB 8-Yr CPF Cap For HDB Loans

Available only for HDB mortgages, POSB has been aggressively marketing this special “hybrid” product where it is fundamentally a floating rate package at FHR (Fixed Deposit Home Loan Rate) currently at around 0.40% plus a spread of 1.48% which comes to 1.88%p.a.  This spread is high compared to most banks’ promotional interest rate spread of 0.85-1.05% and even the longer term spread of usually 1.25% after 3 years.

The attractiveness of this loan lies in its “fixed” component where it caps the interest rate at the CPF ordinary account rate currently at 2.5% p.a. up to the first 8 years of the loan which is a long time.  And that is quite a safeguard against spiralling interbank rates as CPF rate is known to be stable and inelastic to market.  The Singapore government will not want to raise this rate frivolously as it means raising their costs of funds.

This feature is good for those who do not mind paying a slightly higher rate than market (by 50 basis points when compared to floating rate promotions now at around 1.2-1.3% p.a.) in return for that peace of mind.  The final rate at 1.88% p.a. is still lower than the current fixed rate package of 2.18% p.a. with the longest fixed rate period of 5 years.  In a way this is like a middle-of-the-road option between fixed and floating.

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(e)   DBS Multiplier Account  

Lastly in recent years banks have started to bundle their products together to increase the “stickiness” of customers to the bank.  DBS is the first to start offering is in the form of a DBS Multiplier Account – an account that pays you above deposit interest that is way above market for up to first $50,000.  This interest can range from 0.98% t0 2.08% p.a. and is determined based on the “monthly cash flow”, a measure on how much business or activity you do with the bank, comprising the sum of four components – monthly salary credited into a DBS/POSB account, total monthly spend on the banks’ credit cards, monthly mortgage instalment with the bank, and total monthly investment dividends going into a DBS/POSB account.

Besides DBS, OCBC is the next and only other bank at the moment to offer such an account which pays much higher interest (up to 3%) based on total relationship with the bank called the 360 account. However for OCBC the cash flow measures are slightly different and mortgage instalment is not one of them.

For those with existing relationship with DBS and would like to earn higher deposits interest on their spare cash, provided DBS mortgage interest rate is not too far away from the next best in the market, it does make some sense to consolidate your business to DBS, or any bank that comes up with product bundling strategy later on.

Consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.

 

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How To Select Home Loan – Loan Restrictions

Loan Restrictions

After deciding what kind of interest rate package suits you best especially between fixed or floating rate, we look at step 2 of the 5-step review process in selecting a home loan, ie. loan restrictions.

To recap the 5 steps are:

  1. Interest Rate
  2. Loan Restrictions (eg. lock-in period, prepayment penalty etc.)
  3. Loan Features (eg. interest offset account, switching between sibor periods etc)?
  4. Relationship with the bank
  5. Tenure and Loan-to-Value

Besides interest rate, loan restrictions such as lock-in period could be the next most important factor to assess in deciding on a housing loan.  What is lock-period and what are some of the other common or hidden factors to watch out for?

 

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(a)  Lock-in Period

As the name implies, the lock-in period is the period where the borrower is “locked in” with the bank as he enjoys a special promotional interest rate usually in the initial few years of the loan as covered in step 1.  This period can be anywhere between 1 to as long as 5 years depending on whether it is a fixed or floating rate package.  The borrower trades off his right to switch to another bank during this period in return for the better rate offered.  In the case of sibor-based loans the spread that the bank charges is typically lower by at least 30 basis points during the lock-in period from 1.25% down to 0.95% or lower.  Should the borrower be forced to redeem his loan in full during the lock-in period for example in the case of sale of property, the bank usually levies a penalty of 1.5% on the loan amount redeemed which can easily run up to $10,000 or more for an outstanding loan of $700,000, which wipes out all the savings from the promotional interest.

How do you decide if you should go for lock-in?  As a general rule, if you opt for fixed rate package in Step 1, it normally comes with a lock-in period matching that of the period where the interest rate stays fixed.  Such lock-in is fine and fair given the stability of a fixed monthly repayment that comes with fixed rate for the period.  If interest rate rises too quickly by the time the fixed rate period is over, you can easily refinance your loan again as the lock-in period would also have expired.

The merit of locking in for a floating rate package is not as clear.  This is especially so in the current environment where most expect rates to creep up in the next few years.  If the rate hike turns out to be too soon and too fast, the “promotional rate” you enjoy on your loan could turn out to be less beneficial and you will not be able to switch to a fixed rate loan should you be locked in for too long a period.  Ceteris paribus it will be safer to go for a floating rate package without a lock-in even if the promotional rates are a few shades higher than the best available rate.

More importantly when it comes to lock-in period, you must be certain that you are not going to sell your property anytime soon, at least not within the next few years because of the penalty as explained earlier.  Hence most people will be more comfortable committing to a lock-in period for a loan where it is for the “roof over their head”, as opposed to an investment property which is more susceptible to business cycles.

In the past one or two banks do provide for waiver of this penalty in event of a sale of property but you need to be careful to sight this clause in the loan contract as promised, as it varies from time to time and is by and large not a permanent loan feature in Singapore.

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(b)  Partial Prepayment Penalty 

No one likes to be heavily indebted and hence whenever you get a windfall say some extra bonus at the end of the year you will want the flexibility to pay down on your loan outstanding and hence reduce your total interest costs over time.  You can appreciate why then this is also an important feature to establish for your loan.

As a general rule, loans that come with a lock-in period attract a penalty whenever you try to redeem in full or even pay down in partial.  As explained this prepayment penalty is usually 1.5% on the loan amount redeemed which of course then wipes out some of the interest savings you wanted to achieve from paying down portion of the loan.

Some banks do allow for paying down of up to 20% of the loan without a penalty even with a lock-in period promotional rate.  For those refinancing, note that some banks might also require that you to keep a certain minimum loan amount after partial repayment for example $200,000.  Check with an experienced mortgage broker who will be able to list out for you all the loan restrictions in a chart format for easy comparison.

(c)   Re-pricing Admin Fee

Another factor which is of lesser significance to consider is the re-pricing admin fee.

First what is re-pricing?  It simply means going back to your current bank (for those with existing mortgage for refinancing) and ask to switch over to another loan package after the expiry of your lock-in period if any.  The bank usually has a specialized department that handles all re-pricing requests.  They will gladly offer you any of their existing packages for new customers but subject to an admin fee which from our knowledge can vary greatly between $200 to $800.  Most of the local banks will charge $800 for re-pricing.   Incidentally CIMB charge only $200 for re-pricing.

How important is this a factor in your consideration depends on how likely you think you are going to stay with the same bank for personal reasons.   But remember re-pricing happens only a few years down the road and the admin fee might also be revised upwards by then (used to be $500 for local banks in the past).  For most people this may not be a salient factor as refinancing to another bank altogether not only ensures you get the best rate but many banks still provide legal subsidy which covers all the costs involved and makes it cheaper than re-pricing with the same bank ironically.

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(d)  Breakage Fee

The last 3 fees are not so much factors of consideration when choosing a loan, but more to know… starting with breakage fee.

Nowadays most people are on market-pegged loans of 3-month sibor or sor.  What this means is that the your interest charged is set or determined every 3 month and will not change in the ensuing 3-month “interest period” even though the sibor rates in the money market actually fluctuates daily.  The implication here to you is that if you should want to do a partial or full repayment of your loan, you need to effect that exactly on the expiry date of this “interest period” which happens every 3 months.  If you fail to do so for example some borrowers forget to negotiate that during the sale of the property and ends up redeeming his loan in full on completion date which falls outside the expiry date, you may be charged what is termed as a breakage fee of 0.5% (depends on the bank) on loan amount redeemed.

(e)   Cancellation Fee

Cancellation fee is levied where one cancels the loan even before it is disbursed.  This is usually around 1.5% on the amount cancelled.  It is usually not a factor of consideration as hardly anyone cancels after signing the loan offer document.  Also even if you do change your mind after signing on the dotted line, you can always wait for your loan to be disbursed and then arrange for refinancing provided there is no lock-in period.

However cancellation does come into play for loan on property under construction where there is progressive disbursement of the loan.  In some cases where buyers decide to switch over to another bank’s package just before TOP due to some aggressive pricing or incentives they must be more than prepared to pay 1.5% cancellation fee on the 40% loan yet to be disbursed.

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(f)    Legal Fee Subsidy Clawback

Lastly there is the legal fee subsidy clawback for refinancing cases where the borrower will need to refund the initial legal fee subsidy (usually capped at $2000) paid for by the bank at the outset if he choose to move his loan again within 3 years of refinancing it.  That is the reason why we always look at the average interest rate in the first 3 years of the loan as beyond that there is usually no more lock-in nor legal fee clawback.

Consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there. See their testimonials.

 

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How To Select Home Loan – Interest Rate

Interest Rate

There are 13 banks and 2 finance companies in Singapore that provide mortgage loans to customers.  It will certainly be a frustrating experience trying to call all of them and then figure out which one is the best for you especially when they come with different features besides pricing.  What are some important factors to consider when one selects a mortgage?

Broadly-speaking there are 5 areas to look at and in a five-part series we like to cover them one by one starting with this article which explores the number one factor for most people – interest rate.

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Before we start let us first summarize the 5 factors of considerations in choosing a loan.  They are :

  1. Interest Rate Structure
  2. Restrictions (eg. lock-in period, prepayment penalty etc.)
  3. Any special features (eg. interest offset account, switching between sibor periods etc)?
  4. Tenure & Loan-To-Value
  5. Relationship with the bank & one’s credit standing

Let’s begin.  As we have said earlier by and large interest rate is the single most important factor customers will look at when choosing a home loan.  And when it comes to interest rate you have to further look into how it is structured and there are a few aspects which will be spelt out clearly in the loan offer document.

a)      Promotional rate VS Long-term rate

Typically the bank will offer a lower spread (eg. +0.85% to +1.0%) hence a lower rate in the first three years of the loan, sometimes even up to first five years for sizeable loans.  After this “promotional period” most banks will then revert the spread back to a higher “long-term” rate (typically +1.25%) which then applies throughout the rest of the remaining tenure.  However there are 2 banks in the market that buck this trend and offer to hold this “promotional” rate all through to the end of the loan tenure.  That is certainly a big factor to weigh in your deliberation as it effectively saves you the trouble of having to refinance after the end of each promotional rate period or every 3 years.

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b)      Floating rate VS Fixed rate

Next you also have to look the pros and cons between going for a floating rate package as opposed to a fixed rate.  Most banks are not very keen to do a fixed rate lock-in at the moment with rates expected to rise over the next few years as the global economy recovers.  Frankly this is more of an art than science – to try and determine when rates will eventually rise and how fast that will be.  The debate goes on at every level and even within US Fed’s FOMC meetings.  There is no right or wrong answer and a lot depends on your own outlook on interest rate.  Follow our blog post here as we bring you the latest scoops.

It may be worth mentioning that at present moment the gap between the lowest fixed rate package at 1.48%p.a. and the best floating rate packages at around 1.2%p.a. is only 30 basis points which will not make too much of a difference to your monthly instalment.  For example on a typical $800,000 outstanding housing loan balance for refinancing over a period of say 20 years, the difference between the 2 instalments of $3860-$3750 works out to only $110 per month or around 3% more.  Hence it may be worth switching to a fixed rate loan for the next 3 years for that peace of mind.

c)      Market-pegged VS Board-pegged

How about which benchmark to peg your loan interest on?  In Singapore, most banks offer only 2 benchmarks – money market indices (usually 3-month sibor or sor) or the bank’s own internal board rate for residential property.  Usually the bank adds a markup as their profit, also known as a spread, over this 3-month sibor, or likewise subtracts a margin from its board rate, which then forms the final rate. Over the last 5 years, most customers prefer a more transparent benchmark like 3-month sibor rather than board rates which is subject to the idiosyncrasies of the bank.  Albeit most bankers will tell you their board rate has proven to be stable and has not moved an inch in the last 5 years.  Still that was only in the last 5 years since 2008 where rates were generally ultra-low.  There is a perception in the market that banks will be slow to reduce their board rate but quick to adjust upwards when money market rates start to move.

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DBS has recently introduced a new and first-of-its-kind peg called the FHR – Fixed Deposit Home Rate.  The bank defines this as the average of the bank’s published 12-month and 24-month Singapore dollar time deposits rate which currently hovers at around 0.40% similar to your 3-month sibor rate.  So far the market seems to have received the FHR quite well going by early results on its loan books.  Here at MortgageWise, we think FHR may be more stable and any future increases in FHR will lag behind sibor and sor for the simple reason that fixed deposit rates form the cost of funds to the bank especially for DBS with a huge deposit base they will be slow to increase their cost of funds.

Watch this space for the next few write-ups on what else to consider in choosing the best loan package for yourself.

Alternatively, consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.

 

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