Low interest rates = Good time to refinance housing loans?

The Straits Times
Sep 4, 2011

But home owners should make sure the savings outweigh the refinancing costs

By Magdalen Ng

It seems to be all doom and gloom on the global economic front but there is one silver lining for Singaporeans - rock-bottom interest rates that are making mortgages far more affordable.

That means there has probably never been a better time for homeowners to refinance their housing loans.

The Singapore inter-bank offered rate (Sibor) and the swap offer rate (SOR), two common benchmark interest rates used to set mortgage rates, are at record lows.

Sibor is the rate at which local banks lend to one another. On Friday, the three-month Sibor was 0.331. Sor has even turned negative. The three-month Sor was -0.051 on Friday.

Those numbers can add up to some serious savings if you refinance or switch to a new home loan, either with your existing bank or another institution.

Many savvy Singaporeans have clearly picked up on this, given that some loans experts are experiencing a 20 per cent to 30 per cent increase in the number of refinancing queries.

Mr Paul Arrowsmith, HSBC's head of retail banking and wealth management, has seen home loan refinancing volumes increase about three-fold in the past year.

He said: 'This is a good time to refinance, to take advantage of the low interest rates.'

Fixed or pegged rates?

Customers usually take fixed-rate loan packages - where the rates are fixed for the first two to three years - when they need protection against rate hikes.

The United States Federal Reserve has pledged to keep interest rates low until mid-2013 so rates here are also likely to remain flat. Packages pegged to the Sibor or Sor may be more cost-effective.

Mr Goh Eck Hong, a housing loan adviser at myhousingloan.com.sg, said: 'People who took up fixed-rate packages should give some thought to refinancing.

'Since local lending rates move in tandem with the US', it is reasonably safe to assume that the local mortgage lending rate is going to stay where it is for some time to come.'

But there is no guarantee, so some customers might want to opt for the fixed-rate option, said Citibank Singapore's business director for secured finance, Mr Peng Chun Hsien.

'An attractive fixed-rate package, which will fix the interest rates for a specific duration, can offer peace of mind. There will be certainty in their monthly repayments for the next two to three years.'

Real estate investor and businessman Sameer Aswani, 35, prefers fixed-rate packages because he is more conservative.

He recently refinanced a property at the Marina Bay Residences.

He said: 'I was paying 1.5 per cent interest yearly. Now the new revised rate would be at just 1 per cent with Maybank, fixed for one year.

'Although the SOR floating three-month rates would be lower, I am more conservative and prefer to lock in my rates on a yearly basis. I am saving about $20,000 per year from just this one unit at the Marina Bay Residences so when the lock-in period ends for my other properties, I will surely have them repriced at a lower interest rate.'

Attractive packages

With many investors thinking like Mr Aswani, banks are offering competitive rates to get a slice of the refinancing pie.

Citibank is offering a one-month Sibor plus 0.7 per cent loan package. With the one-month Sibor at 0.218 per cent, this works out to effective interest rates starting from as low as 0.918 per cent throughout the loan tenure.

Their customers can also switch between one-, three-, six- and 12-month Sibor tenors, or from a floating rate to a fixed rate free of charge.

OCBC Bank's deal has a three-year lock-in, and on top of the three-month Sibor, has a spread of 0.55 per cent for the first year, 0.6 per cent in the second, 0.65 per cent in the third, and 1.25 per cent thereafter.

DBS Bank's latest offer is pegged to the one-month Sibor or three-month Sibor, with a spread of 0.85 per cent for the first three years. For the three-month Sibor package, the interest rate is capped at 1.49 per cent for the first three years.

HSBC has a loyalty package, which is Sibor plus 0.9 per cent for the first year, 0.85 per cent for the second and 0.8 thereafter. There is a cash incentive of 0.4 per cent of the loan amount, capped at $10,000.

However, Ms Phang Lah Hwa, OCBC Bank's head of consumer secured lending, said: 'With the myriad of refinancing packages available in the market, it is always advisable to evaluate your choices before making your decision.'

Is this a good time to refinance?

If you have borrowed $1 million over the next 20 years with a current interest rate of 3.75 per cent and refinance it to 1.18 per cent interest in the first year, the savings amount to about $1,000 a month.

Mr Derrick Ang, director of mortgage sales at consultancy portal SingaporeHousingLoan.sg, said that in general it is prudent for home owners to review their loans every three years or so, regardless of interest rates.

He added: 'If there are significant cost or interest savings, I would recommend it.'

OCBC's Ms Phang added: 'With current market interest rates at low levels, home loan refinancing seems an attractive option for many.'

But there are various costs that come with refinancing, so home owners should make sure the savings outweigh them.

Cost-benefit analysis

As a rule of thumb, if you plan to sell your property in the short term, it may not be wise to refinance, taking into account the costs incurred and the limited time that home owners get to enjoy the interest savings.

Other costs incurred from refinancing

•Lock-in period of the existing loan

A typical lock-in period is two to three years so if you withdraw your loan within this time, there might be a penalty of 1 per cent to 1.5 per cent of the outstanding loan.

Property owners thinking of selling in the next two to three years should choose a package with a shorter penalty period or one with no penalties attached.

For a loan amount of $600,000, you would save about $6,000 to $9,000 if you choose a package with no penalties attached over one that imposes a penalty.

•Conversion fee

There is a conversion fee of $500 to $1,000 which will be incurred even if you are no longer within the lock-in period.

•Clawbacks

Refinancing requires conveyancing paperwork. However, the new bank will usually subsidise this cost, about 0.3 per cent to 0.4 per cent of the loan amount, capped at $2,500 for private properties and $2,000 for HDB flats.

Mr John Lee, head of free online home financing service LoanGuru. com.sg, said that the legal clawback is always three years; even if the lock-in period is two years, the legal subsidy has to be returned.

Some other subsidies, such as valuation and fire insurance, may also have a three-year full clawback period.

Is refinancing for me?

The choice comes down to whether there will be a significant amount of savings after subtracting the cost of refinancing.

DBS Bank's managing director and head of deposits and secured lending, Ms Lui Su Kian, said: 'Buyers should remain prudent and take into consideration how interest rates will impact their repayment and not focus solely on the initial years' interest rates.'

UOB's head of loans division, Ms Chia Siew Cheng, agreed: 'Buying a home is a long-term financial commitment.

'Regardless of the prevailing interest rate environment, home buyers should always assess what they can afford to ensure they are able to service a housing loan over a longer period of time.'

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