http://www.straitstimes.com/archive/...-list-20140302
Refinancing that home loan on many a to-do list
Borrowers should do their sums and assess all options before picking a package
Published on Mar 02, 2014
By Melissa Tan
For many home owners, refinancing their mortgages is likely to be near the top of their to-do lists amid fears of a rise in interest rates.
The Government last month also made it easier for many home owners to refinance their home loans by widening exemptions from its total debt servicing ratio (TDSR) requirements.
Still, experts say that borrowers should do their sums and assess all available options before picking a new loan package.
"A home loan is a long-term commitment," said OCBC Bank's consumer lending head Phang Lah Hwa.
"We advise customers to take a holistic view that goes beyond pricing, taking into consideration the overall package, including service and terms of the package."
Ms Lui Su Kian, managing director and head of deposits and secured lending at DBS Bank, said: "Customers should consider their plans for the current home as well as factors that can impact their repayment ability."
Refinancing is when borrowers switch to another bank to get a cheaper home loan, as opposed to repricing which means they change their loan package but stick with their current bank.
The central bank said last month that borrowers who are refinancing the loan for the home they live in are exempt from TDSR even if they own other properties and are servicing other property loans.
TDSR, imposed in June last year, stops borrowers from taking or refinancing home loans that will bring their total monthly debt repayments to over 60 per cent of their gross monthly pay.
Home owners who bought their units as investments before TDSR kicked in last year were also given until the end of June 2017 to refinance without needing to meet TDSR, though when they refinance they have to commit to a debt reduction plan with their bank.
Banks in Singapore usually offer mortgages at a fixed rate, floating rate or variable rate, though some also offer hybrid bundles.
The Sunday Times looks at the different types of home loans and what borrowers can consider when refinancing.
Fixed rate loan
As the name suggests, the interest rates on this type of loan are set at a predetermined absolute number.
The rates will usually apply for a certain amount of time known as the lock-in period.
Fixed rate loans are suitable for borrowers who want their monthly instalments to remain stable, said Ms Phang.
"As the interest rate is fixed for the lock-in period, the monthly instalments will be fixed and will not change. Typically, fixed rate packages come with lock-in periods and penalty charges."
Within the lock-in period, if the borrower changes the terms of the contract - either by cancellation, prepayment or conversion - he or she has to pay a penalty.
Mr Alfred Chia, chief executive of financial advisory firm SingCapital, said fixed rates were the most popular mortgages. Some go as low as 1.2 per cent for the first year.
The fixed rate loan segment has been seeing increased interest from home owners lately.
"Fixed rates are gaining popularity, especially with recent promotions that offer subsidies," said Mr Sean Lim, who runs mortgage portal Findahomeloan.sg.
Ms Lui said the take-up for DBS' fixed rate mortgages in January this year was five times the number in January last year, with 30 per cent of the bank's refinancing customers opting for fixed rates.
"Customers realise that the best time to lock in an attractive set of long-term fixed rates is during a low interest environment."
Mr Lim said fixed rates tend to make sense for borrowers who take out less than $800,000 in loans but for larger amounts, floating rates could provide more savings over the next two to three years.
Floating rate loan
For floating rate loans, the interest rate is pegged to market benchmarks such as the Singapore Interbank Offered Rate (Sibor) or, less commonly, the Swap Offer Rate (SOR). The bank usually tacks on a premium, also known as a spread, on top of the benchmark rate.
Sibor is the interest rate at which banks lend to each other.
The three-month Sibor is the interest rate for borrowing money for three months. This means that the effective Sibor component of the mortgage will be adjusted every three months.
The three-month Sibor is generally higher than the one-month Sibor because lending money for longer periods of time tends to carry more risk.
Mr Vinod Nair, who runs mortgage portal Smartloans.sg, said the average floating rate on the market right now is Sibor plus 0.95 per cent for the first three years of the loan.
The three-month Sibor is hovering around 0.4 per cent so that would add up to 1.35 per cent.
Although this sum is slightly lower than the market average of 1.45 per cent for the first three years for a fixed rate loan according to Mr Nair, the borrower also risks Sibor shooting up suddenly.
Mr Saktiandi Supaat, head of forex research at Maybank Singapore, thinks the three-month Sibor will hover around 0.39 per cent to 0.4 per cent this year.
OCBC economist Selena Ling expects it to rise to 0.47 per cent by the end of next year.
SOR is less commonly used and is calculated using a formula that takes into account the current and expected exchange rates of the US dollar against the Singdollar and the local interbank lending rates for the greenback.
Variable rate
There are also variable rate loans where the interest rate is pegged to the bank's board rate.
Board rates differ across banks. It is unclear how these rates are derived and they are not easily available.
Mr Lee Chee Kian, a senior consultant at financial advisory firm Providend, said banks can change their board rates at their sole discretion.
Board rates can lag behind interbank rates such as the Sibor but they are less volatile than Sibor, he added.
Doing the maths
Borrowers should do their sums before signing on the dotted line, experts said.
"It is important for customers to look at the overall interest rate and not just the introductory rate," said Mr Dwaipayan Sadhu, who heads consumer transaction banking and mortgages for South-east Asia at Standard Chartered.
"They should also pay attention to other fees or charges which they may need to pay in order to complete the refinancing process."
One example is legal fees, which can be a few thousand dollars.
Smartloans.sg's Mr Nair said that though some banks may offer legal fee subsidies, it is unlikely that borrowers will get a subsidy if they are refinancing a loan of less than $300,000.
"If you pay for it yourself, refinancing no longer becomes cost effective due to the need to break even on your legal cost... unless your aim is to switch to a fixed rate for security, in which case paying the legal fees yourself can be justified as buying security with an unchanging rate for a certain duration of time."
Picking the right time
Another crucial aspect is timing, which also depends on the lock-in period of the borrower's current home loan.
Findahomeloan.sg's Mr Lim said a good time to refinance would be three to six months before the lock-in period's expiry.
This is because the notice period borrowers must serve to their current bank is typically three months.
Mr Nair added: "If you are in your fourth year already with a floating rate package and your interest rate is somewhere around the 1.8 per cent to 2 per cent region, you should act now."
But he cautioned that those switching to fixed rates should sign up for at least a three-year fixed rate loan "as you want to fix it for as long as possible".
"This avoids a situation where the Sibor starts to rise in the next two years and you end up emerging from the fixed period, right smack into a high Sibor rate."
Providend's Mr Lee also said: "You may not want a lock-in period if you intend to sell the property in less than two to three years."
SingCapital's Mr Chia noted that buyers may not want to sell so quickly anyway to avoid seller's stamp duty.
"Consumers should always exercise their consumer rights by comparing which banks provide great offers, and not stick to one bank for convenience's sake," he added.
However, Citibank Singapore's secured finance business director Peng Chun Hsien said: "By moving the loans to other banks, the borrower's relationship with the bank may also be impacted as he may find that he has fewer tools to use in leveraging on his relationship with the bank."
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