refinance home loan sign

Is There Really A Need To Refinance?

Being mortgage brokers, you would probably expect us to reply yes to this question.  But the answer is – “it depends”.  There are always two sides to everything so let me present both the argument for and against, and explain why it depends.

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No.  There’s no need for the hassle to change lenders every time.

Being in the industry for so long, we know some banks like to think that mortgage brokers “take customers away” come renewal time, so they are hesitant to work closely with us or choose to cut off brokers at times with certain “direct-to-bank” packages.  However, I believe that thinking might not be keeping up with the times.

The last two years during the pandemic have really seen the millennials (25-40 years old) come of age in terms of the whole movement on ESG (environmental, social, government), green energy, digitalisation, e-commerce, cryptocurrency, even the power of retail investors as seen in Reddit/Robinhood traders in the U.S.  This group of young but up and coming consumers are discerning, wants the best and are not hesitant to make a strong statement when necessary.  Unlike homeowners of past generations, no longer will they simply accept repricing quotes from bank without checking around who has the best rate in the market.  The writing is already on the wall even before the pandemic, as far as this digital movement and the shifting pricing power of consumers is concerned.  Covid-19 merely accelerated it.

Banks are finding it much harder nowadays to retain existing customers as mortgages become commoditised.  Especially if they are not prepared to offer or match close to some of the lowest rates out there.  This is all part of a healthy functioning free market.  It’s the same reason why globally inflation is struggling to come up in this decade – e-commerce and internet has fundamentally change buying behaviours as consumers access price information with ease and look at reviews online.  So, I put to you – it’s not the brokers taking businesses away from banks on repricing, we only facilitate this process of price comparison.

In fact, we noted in the past years banks are slowly coming to terms with this change in pricing power – many are now quoting more favourable rates for repricing.  In our humble opinion, the only real way for banks to grow interest income in the digital economy is no longer margin expansion but to pump up the volume. To this end the savvy ones will do well to work with brokers for maximum distribution of their mortgage products.

To sum up, there may not be a need to switch financiers if you get comparable quotes and are totally happy with your bank and all the features of the loan.

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Yes, you should switch to get the best out of free market.

calculating mortgage repayments and interest costs

Now the argument for refinancing.  There are actually two reasons to switch – emotional and material.  Let me explain.

Emotional Feel-Good Factor

If you were to buy one Rolex watch every single year from a particular store, you would expect to be accorded a certain level of service and the best price too as a “frequent and loyal” customer.  Wouldn’t you?  Ok maybe not Rolex, but if you give $15,000 worth of sales to a company, and I am talking every single year, you would expect to be quoted good price for all your purchases.  

You may think that not many of us will be spending $15,000 buying products and services from the same merchant every single year, which works out to be $1,250 per month.  But you may be surprised – you are doing just that for your mortgage!  You just didn’t realize.  You are giving the bank about $15,000 worth of interest income or revenue every single year based on a typical loan of $800,000 for a private property at average interest of 2%, at least in the first 5 years of the loan.

Yet, the truth is when you ask for a repricing quote, very often you don’t get the best rates initially.  You probably have to haggle for a while and stand firm before they will finally accede to your request, if at all.  Understand we are merely stating a fact based on our observation on the ground. Some banks do measure up when it comes to customer retention.  But most can certainly do a lot better not to let repeat and loyal customers feel slighted.  To be fair, this is not unique to banking and is almost ubiquitous across all industries with subscription models like telcos.  Companies always dangle a better deal to woo new customers to the neglect of existing ones.

Consumers too would do better staying aware of how much business you are giving and fighting for your rights to better terms and privileges.

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Material Gain

stack of coins showing money saved

Maybe we are crazy to advocate banks giving the best rate for repricing.  Because if no one switches bank when lock-in expires, then brokers like us will have no business.  We can only hope to do new purchase loans but that pie might be too small.  It’s not any surprise then that when banks start to offer aggressive repricing rates like this current period, we see more “desperate” brokers resorting to use any line of argument just to get you to switch.

At MortgageWise, we decide to take a more enlightened approach to this – after we present all the home loan packages (direct or broker rates), as well as our perspective on what’s the best strategy to adopt in view of the interest rate cycle, we’ll respect your decision if you opt to reprice.  However, as we believe in the power of free market, we have confidence that if we can eke out at least a 10-bit (0.10%) savings, you should still consider refinancing.

Our single-minded objective is to deliver this – Save up to 2 full year’s interest over a 30-year cycle!  This means if you service a mortgage for 30 years (from age 30 to 60), you will pay interests for only 28 years when you choose to work with us.

There are two parts which adds up to 4% in total by our estimate:

Part I: Save 0.10% every time you refinance through us – 1% over 30 years

Sometimes we do even more than 0.10%.  For the average homeowner who work with us on their first property purchase (likely an HDB) from age 30-35 until they are close to 55-60 years old, we conservatively estimate about 10 rounds of refinancing every 3 to 4 years (due to legal fee clawback periods) over a 30-year cycle.  This includes all the buying and selling of properties, upgrading to private, buying second property which mean two mortgages.

As we aim to deliver 0.10% savings each time (otherwise you will just reprice), that’s 10 x 0.10% or 1% savings in total.

Part II: Save 3 x 1.0% by pre-emptive move before cycle turns – 3% over 30 years 

Over a 30-year cycle, we estimate that you will see through three full interest rate cycles: 3 market troughs in interest rates which eventually turn up, and 3 market peaks which eventually crash.  Working with us in anticipating such turning points in the cycle, we aim to help you make “pre-emptive strikes” on all six occasions – we will alert you 6 months ahead to lock down fixed rates early before an upcycle, and switch to floating with a move down.

Each correct call will save you a 0.50% difference in actual rates signed.  In the last big cycle-turning call in 2019, we asked clients not to reprice at fixed rates of 2.38% but switch to SIBOR floating rates at 1.80% before it finally crashed to 0.60% by the following year. It’s more than 0.50% on that occasion but it’s largely a black swan event which is totally unexpected.  So, let’s just assume an average reduction of interest rate signed by 0.50% for each correct call that we make 6 months ahead, i.e. about two rounds of Fed rate hikes/cuts.  This means a total savings of 1% in each pre-emptive move as most packages are for 2-year lock, sometimes longer. Even if we were just to make the correct call 50% of the time, or 3 such occasions but not all six, that already saves you 3% in total.

And with the Fed looking likely to bring forward its tapering plans and lift-off in rates, we started making another important call to clients now to be sure we are well-positioned for the turn in 2023. Speak to our consultants to understand more. A hint – it’s not the “play it safe” message that you normally hear from other brokers.

As the average interest you pay historically is probably around 2% in the last two decades, total interest savings of 4% over the course of 30 years would mean effectively mean paying interests for two less year when you work with us over the long term.

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It depends, there could be other factors

Coming to back to the question on the need for refinancing, it’s clear now the answer depends on how you perceive a 4% savings over a lifetime of mortgage servicing, or around $30,000 for the average loan size on a private property.  Is that worth all the effort of refinancing?  We think yes, as you could certainly use $30,000 on many things for yourself and your family, instead of making the bank richer.  But it’s subjective, some may not think the same way, as that translates into just a savings of $1,000 per year over 30 years.  We respect that.

There could yet be other reasons for refinancing besides emotional and material reasons.  Some of these include:

  • The need to decouple on property ownership which requires the original mortgage to be first redeemed and which makes refinancing a better option.
  • The need to sell a property soon and hence to look for a home loan package which has no lock-in or one that offers a waiver of penalty due to sale.
  • Pull factors like mortgage interest-offset accounts which are particularly useful for active traders who go in and out of stock markets, priority banking privileges, etc.
  • Push factors like bad service or bad experience with multiple revisions on interest rates in the past, or being subject to unfair terms unilaterally amended and applied by the lender 

Speak to our team of consultants if you still have doubts on the need to refinance, or you have another perspective to share with us.  We’ll love to hear that.

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