what to consider when refinancing home loan

The Fixed Rate Conundrum

With the markets now pricing in more aggressive pace of rate hikes from 2017 onwards, one difficult decision to make now is that of how long one should lock in fixed rate for?  How much premium should one pay for locking into a longer fixed rate term? We do have one lender now offering a fairly attractive 5-year fixed rate at 1.99% versus the lowest fixed rate of 1.40% but 2-year fixed, for private property home loans.

For a while now we take the position after Brexit that in an uncertain macro environment going into 2017 the best strategy one should adopt is to stay flexible – go for either low floating rate packages with no lock, or take the absolute lowest 2-year fixed rate which will end early enough for one to then lock in a longer fixed term by 2018 when it becomes absolutely clear where rates are heading.

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However with a seemingly attractive 1.99% 5-year fixed rate (anything below 2% is worth considering if one looks at the long term historical trending of 3-month SIBOR over the past 30 years which average around 4%, see our SIBOR chart), is it worth considering paying that premium?  One will surely save on 2-year fixed rate by quite a huge margin.  The difficulty lies in predicting the interest rate level by 2nd half of 2018 when that 2-year fixed term ends.  Will global economy still be stucked in this low growth trap with rates just barely higher than today?  Or would the Trump administration be so successful in rejuvenating the American economy through fiscal spending leading to rising inflation with soaring interests and USD/SGD back to its hey days of 1.70?  Could 3-month SIBOR go back to a level near its most recent high of 3.56% in 2006 almost a decade ago?  Remember in the last few interest upswing cycles, US Fed hiked rates at 25 basis points every quarter leading to a full 3% rise in interest rates over 3 short years.  Is history about to repeat itself with fiscal and monetary policy working hand in hand this time to revive the growth engine?

It is indeed a conundrum for homeowners – take a bet and lock in immediate savings now at 1.40? Or bite the bullet by paying near 2% now but stand to reap substantial savings in the later years?

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As no one knows what is going to happen, perhaps the best way to answer this question is to do a comparison of the two most probable scenarios and thereby draw your own conclusions.  We will look at a typical private property loan of $700,000 for refinancing over a 25-year tenure:

 

fixed rate mortgage

 

We compare the total interest incurred on a 5-year through fixed rate today versus two scenarios. Scenario A is where we assume two rate hikes per year leading to a full 1% increase in prevailing fixed rates over two years, ie. 3-year fixed rate to go from 1.65% today to 2.65%.  Scenario B is where we assume the pace of rate hikes intensify in the 2nd year to one rate hike per quarter, hence a total of 6 rates hikes or 1.5% increase over the two-year period, hence 3-year fixed rate would hover near 3.15% in 2 years.  Notice that even though the monthly repayment for 5-year fixed may be higher now by 7.1% at $2,964 versus $2767, over the span of five years the total interest paid on the strategy of 5-year fixed turns out to be the lowest.

Of course this could be an overly-simplistic representation of how events would unfold and we could be totally wrong.  In event Euro fractures or we have another global recession triggered by trade wars or even real wars, homeowners would save the most on the lowest absolute 2-year fixed rate today or even certain floating rate packages, as interest rate would continue to stay low for prolonged periods.  If there is something we could learn from events in the past year, that would be – anything can still happen.

Still doing such interest rate modelling is one good way, and perhaps the only way, for one to have a sound basis on his decision to go long or short on fixed rate.  Speak to our consultants today to find out more and get their valuable inputs on your unique situation and objective.

 

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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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with careers in banking & real estate before becoming an entrepreneur.
View all posts by Darren Goh

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