To refinance that home loan or
not?
Experts give their take on interest rates
and sound a warning
Yasmine Yahya
With interest rates at record lows it is clear that they have
nowhere else to go but up, yet just when that might happen is
keeping plenty of us on edge.
Home buyers have the most skin in this game; any rate
rise will immediately hit them in the form of higher
repayments.
Trouble is, predicting interest rates movements in these
days of financial turmoil can be a fool's game, but it is still
worth trying given the huge impact they have on our financial
lives.
Will interest rates rise any time soon?
Mr Edward Lee, the regional head of research for South-east Asia
at Standard Chartered Bank, says this is unlikely.
"Interest rates are more likely to stay low for some
time. The global economic environment simply does not allow for a
sustainable rise in interest rates any time soon," he said.
Furthermore, the Federal Reserve of the United States is
expected to start raising rates only in 2014, he noted, leaving
very little impetus for rates to rise in a sustainable fashion over
this year and most of next year.
Singapore allows market forces to move interest rates,
resulting in rates following those in the US.
The US has kept interest rates at near zero in order to
boost liquidity and get its economy out of the rut.
As a result, the Singapore Interbank Offered Rate
(Sibor), a commonly used benchmark rate for home loans, has hovered
near an all-time low of 0.4 per cent.
Following the US Federal Reserve's announcement this
month that the funds rate would be kept low, many economists expect
that the Sibor will stay at current levels until mid-2014.
Interest rates would rise suddenly only if, for example,
the US economy makes a surprise rebound, Mr Lee said.
OCBC economist Selena Ling, agrees. "At this juncture, it
may be premature to call for interest rates to trend higher," she
said. Singapore's growth prospects remain dovish, she added, with
economic growth tipped at around 3 per cent for this year and
around 4.5 per cent next year.
"However, we will have to closely monitor the euro zone
debt crisis developments, which may continue to play out like a
slow-motion train wreck similar to the global financial crisis of
2008 and 2009," she said.
Domestic interest rates may normalise slightly from the
very low levels now but are unlikely to rise sharply unless the
global economic outlook changes dramatically, she said.
So should you think about refinancing your home
loan?
The answer would depend on several factors, said Mr Goh Eck
Hong, spokesman for home loan advisory firm
myhousingloan.com.sg
"Basically, the main things that a borrower should take
note of is his interest rate, loan quantum and whether the loan is
within a lock-in or clawback period," he said.
"Broadly speaking, as long as interest rate savings are
higher than the legal or penalty costs involved, it will make sense
for one to refinance."
Mr Derrick Ang, the director of mortgage sales at
consultancy portal SingaporeHousing Loan.sg, breaks it down
further, saying that you should refinance your home loan now if
your current outstanding loan meets the following conditions:
• There is more than $100,000 in the outstanding amount to be
paid back. Most banks do not refinance any loan that is less than
this amount, he noted.
• The loan is pegged at an interest rate above 2.5 per cent.
• You have been servicing the loan for more than three years.
This means the loan is no longer under the 'lock-in' period and you
would not have to pay a penalty to refinance.
• You will reap significant savings by refinancing. Most bankers
and mortgage brokers will provide a report to show the interest
saved through refinancing, Mr Ang said.
If I want to refinance, what kind of loan should I
get?
Generally, there are two types of loans - those with a fixed
interest rate or those with a 'floating' rate pegged to market
rates.
Which one to go for would depend on the homeowner's risk
appetite, Mr Ang said.
"If the individual feels that the interest rate is at its
lowest and the only way to go is upwards, it is perhaps better for
him to select a fixed interest rate especially if he is
risk-adverse," he noted.
"On the other hand, if the individual feels that the
interest rate is going to continue to trend low, then a floating
package will make better sense."
Different types of loans also cater to different needs.
Fixed-rate loans are suitable for people who want their monthly
instalments to remain stable, said OCBC's head of consumer secured
lending, Ms Phang Lah Hwa.
"As the interest rate is fixed for the lock-in period,
the monthly instalments will be fixed. This allows the individual
to plan his finances in advance with more accuracy and stability,"
she said.
Typically, fixed-rate packages come with lock-in periods
and penalty charges so there will be costs for redeeming your loan
within the lock-in period, Ms Phang added.
Market-pegged interest rates are more suitable for savvy
property owners who would like to capitalise on current low rates
to minimise loan repayments.
"However, these consumers must be knowledgeable enough to
know that interest rates will not stay low permanently and be able
to time the re-pricing of their home loan packages accurately so
that they are not drastically affected when the interest rates
start to increase," she said.
Some banks, including OCBC, also offer loans at variable
interest rates.
Under this package, the rates are based on the bank's own
board rates. It also has to inform customers of any changes 30 days
in advance.
"Hence, variable interest rates packages will be suitable
for property buyers who want to capitalise on the current low
interest rates but do not want to worry about reacting to sudden
spikes in the market interest rates," Ms Phang said.
Ms Lui Su Kian, the head of deposits and secured lending
at DBS Bank, added: 'A mortgage is a long-term commitment and while
floating rates may appear more attractive in a low interest
environment, homebuyers should understand how rising interest rates
will impact their repayment.'
In the late 1990s, the three-month Sibor rate exceeded 9
per cent, she noted.
DBS has seen an increasing take-up for its new home loan
products, such as the Mortgage Rate Protector and the DBS 2+2,
which offer a hybrid of fixed and floating rates, she said.
Pegged to the three-month Sibor, the Mortgage Rate
Protector allows customers to benefit from the current low interest
while remaining protected by a cap on the interest rate, in the
event that interest rates go up.
DBS 2+2, meanwhile, is a fixed rate programme that allows
the customer to move on to floating rates after two years if
interest rates go down, or exercise the option to stick with the
same fixed rates for another two years.
Since its launch in April, DBS 2+2 accounts for close to
70 per cent of the fixed rate applications, Ms Lui said.
How can you calculate whether you can afford to still
repay your loan if interest rates rise?
Ask a mortgage specialist at your bank to run through the
Monetary Authority of Singapore's Property Loan Fact Sheet with
you.
This exercise will allow you to understand your
commitment if interest rates were to rise by up to 5 per cent from
current rates, Ms Phang said.
Additionally, you could calculate your debt service
ratio, said StanChart's Southeast Asia head of consumer transaction
banking and mortgages, Mr Dwaipayan Sadhu.
This is your total monthly debt payments divided by your
net income.
For example, if your outstanding loans stand at $500,000
while your net income is $1 million, your debt service ratio would
be 50 per cent.
"Make sure to take into account all debt and tax
obligations and income net off CPF deductions,' he said.
"To be prudent, you should base your loan calculation on
higher interest rates, and not just on current interest rates."
Mr Goh from myhousingloan.com.sg added that as a rule of
thumb, any ratio higher than 50 per cent is not healthy.
His portal has a tool that can help homeowners figure out
how their monthly instalment will change as interest rates
vary.
SAVVY BUT PRUDENT
Mrs Loh Siew Mee and her husband David used to take
loans with floating rates but now prefer those with fixed rates for
more peace of mind
Mrs Loh Siew Mee and her 56-year-old husband David Loh, an
education officer, have been investing in real estate for the past
22 years.
They initially took loans with floating rates but this
ended up hurting them.
"During that time, back in the 1980s, the interest rate
just kept moving up and up until it was 6 or 7 per cent. So we have
since decided to go only with fixed rate loans," Mrs Loh, 50,
said.
Their family home is already paid off and in November
2009, they invested in 19 Shelford, a condominium in Shelford Road.
They obtained a loan with a fixed rate of 2.28 per cent and a
lock-in period of two years.
Last December, seeing that interest rates had come down
since they purchased the property, they refinanced and got another
two-year loan.
This time, it came with a fixed rate of 1.38 per cent in
the first year and 1.68 per cent in the second.
"The lock-in period had ended, but the clawback period
was three years, so I still had to pay back legal subsidies, but it
was worth it," noted Mrs Loh, who is a retiree.
Most, if not all, housing loans have a clawback period,
during which, if you decide to exit the loan, the lender will claim
back legal subsidies that they had offered at the start of the loan
period.
"We have been buying and selling properties for the past
22 years or so and consider ourselves as risk-adverse, prudent
investors," Mrs Loh said.
"Although we are aware of the floating rate and have also
taken such a home loan before, we still prefer to live with peace
of mind. Fixed rate gives us this comfort."
Yasmine
Yahya
invest, The Sunday Times, June 24, 2012, Pg 33