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24-06-2012, 09:19 AM
The Straits Times
Jun 24, 2012
To refinance that home loan or not?
Experts give their take on interest rates and sound a warning
By 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.
yasminey@sph.com.sg
--------------------------------------------------------------------------------
SAVVY BUT PRUDENT
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
Jun 24, 2012
To refinance that home loan or not?
Experts give their take on interest rates and sound a warning
By 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.
yasminey@sph.com.sg
--------------------------------------------------------------------------------
SAVVY BUT PRUDENT
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
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
