I want to refinance, but how do I make a decision?

By: Zeng Han Jun, CPCG, Singapore


Even for the experienced property investors, choosing a housing loan is never an easy task. For the home owners who are refinancing for the first time, the process can be very daunting. It is not just about the lowest interest rates. There are in fact many other factors to consider, and every one of them has to be carefully thought through before deciding on the most appropriate housing loan. Here are some of the questions that you might have come across.


1) I am selling my house so should I refinance?


This is a very important question which we have come across many times. Home owners who want to sell their houses and at the same time, paying a high interest rate for their mortgage. They are always in a dilemma with regards to the refinancing issue. What if you refinanced and a seller pops up? Then all the effort, time and money spent on refinancing would have been wasted. This situation has to be carefully studied. How is the housing market performing right now? What is the trend for housing transactions these few months? How is the economic situation? Ask yourself those questions, set yourself a realistic timeframe for the sale. Do not falsely assume that once you put your house on sale, many buyers will come to grab it. From there, determine if refinancing is for you. If not, have an advisor to work it out.



2) Fixed rate or floating rate?


The most common question asked by all home owners. For your information, fixed rate mortgages often have higher interest rates than floating rates. The answer is simple, by fixing the interest rate; the banks are taking a risk. If interest rate plunges, it does not concern the banks at all. If the interest rates rise, the banks will lose out in terms of interest earned. Many fixed rates takers are often first time property buyer or risk adverse consumers. Consumers who normally go for floating rates usually have higher risk appetite and bet that the interest rates will fall. Which category do you belong to? Some people need historical trends to make a decision but always remember, past performance is never an absolute indicator of future trend. If you find that you are nervous when you are asked to choose between the two. Opt to take out the fixed rate and save yourself the sleepless nights if you were to go for a floating rate.


3) I have an account that is linked to my mortgage. Should I refinance?


An account that links to your mortgage, how does it work? Your mortgage interest rate has a direct relationship with your linked account's interest rate. If your mortgage charges you 3%, the interest you earn in your linked account is priced at 3% too. If your mortgage goes up to 6%, you get 6% in your account. Several banks offer this type of packages. People with this type of mortgages often do not want to refinance. Could it be that this financial arrangement is very attractive?

For example:

Your mortgage: $600,000

At 6%, the estimation is that you pay the bank $36,000 in interest yearly.

Your linked account: $80,000

At 6%, the estimation is that the bank pays you $4,800 in interest yearly.

The bank still earns from you $31,200 in interest yearly.

To you, it is still a net loss. When you refinanced, you will realize that this net loss can really decrease substantially. You could have used all these savings on other investments that generate higher returns. Remember, the banks’ motive is to make you part with your money. Your game is to keep this sum of money and make it grow. If they take it away from you, how do you even grow it at all? In the 36 stratagems, this is known as the “Toss out a glazed tile to draw a jade”, that is “present something of superficial or apparent worth to induce another party to produce something of real worth”. They give you a small benefit, and you give them a large chunk of your money. To truly benefit from such a scheme, you have to place a large amount of cash in the linked account in order to offset the interest rate charged by your mortgage. Even if you put a large sum of money, some banks actually prevent you from enjoying the full benefit.


There are many more issues to consider, as different problems exist for different people. Talk to your mortgage advisor about your financing needs and requirements. Choose an advisor that has the experience and your best interest at heart. It definitely makes refinancing an easier task.



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