What to consider when taking up a mortgage or refinancing

In a complex and dynamic market, here are some key factors that may help tilt things in your favour

Feb 23, 2023

Clive Chng

IT IS challenging to accurately predict the trajectory of mortgage interest rates in Singapore, due to the complex and dynamic nature of the financial market. The financial landscape of the region is subject to a host of intricate and interrelated factors such as macroeconomic conditions, government policies, global market trends, local and regional liquidity and local competition, which collectively play a significant role in shaping the evolution of mortgage interest rates. As such, it would be imprudent to make definitive predictions about the future trajectory of mortgage interest rates in Singapore.

Therein lies the question: How then should homeowners and property investors approach their mortgages in Singapore? No one can say with absolute certainty where the markets are headed to, but here are some key considerations that may help tilt things in your favour when it comes to planning for your mortgage:

1) Hybrid loans

In uncertain times, instead of placing all your bets on either a fixed or variable interest rate, you can consider getting the best of both worlds with a hybrid mortgage. A hybrid mortgage package allows a borrower to have some stability with a fixed portion of the loan, and the flexibility with a variable rate option. This would result in an initial lower payment, as the variable rate portion typically has a lower interest rate. In addition, you have the opportunity to benefit from declining interest rates as the variable interest rate portion will adjust, potentially lowering your monthly mortgage repayments. In addition, some banks provide you with the flexibility to choose the percentage of the loan you would like to keep on a fixed/variable rate, to suit your requirements.

2) Adjustments to your loan tenure and how it helps retain liquidity

The current high interest rate environment has put a considerable amount of stress on household incomes as mortgage debt burdens increase. For starters, you have the option to lengthen your mortgage loan tenure, and in doing so, improve your monthly cash flow as instalments come down. It is a common misconception that you would have to stick to the same loan tenure that the bank has granted you when you first took on a mortgage, for the purchase of your property.

There have also been a growing number of homeowners opting to make partial lump sum repayments on the mortgage to save on interest; this decision of prepaying has to be considered carefully and we also have to be mindful that the markets are cyclical. There will be periods of both high and low interest rates. Instead of making partial repayments to save on interest, you can consider shortening your loan tenure so that a higher percentage of your monthly mortgage payments goes into reducing the principal, instead of interest. Your monthly repayments would naturally be higher, but you would have retained liquidity.

In future, you have the flexibility to also adjust the loan tenure again, thereby giving you greater freedom when it comes to balancing your cash flow and interest savings. If you had already made a partial repayment and now need access to that cash, you would realise that you have to jump through many hurdles to obtain it, or maybe, eventually find out that it cannot be obtained.

3) Selecting the best mortgage features that suit your needs

Mortgage packages, especially those pegged to variable rates, come with a variety of features that can help mitigate certain risks or provide you with options to react to different market conditions. For instance, some packages come with the ability for you to sell your property within the lock-in period without incurring any penalties, while other packages offer you the option to make partial lump sum repayments within the lock-in period, giving you the flexibility of reducing your mortgage whenever you feel it is most appropriate.

Some other features that are less commonly heard of are packages that offer an “interest offset” component, where a portion of your liquid deposit earns an interest similar to your mortgage. The interest earned is ultimately used to offset the interest on your mortgage, thereby lowering your effective interest rates. All this is achieved while still having access to your funds.

4) Understanding the rules and regulations in growing your property portfolio

Quite often, most homeowners are only familiar with the rules and regulations that govern the purchase of their first property, for instance, the maximum loan-to-valuation that they can obtain, and stamp duties payable. However, the confusion sets in when owners decide to buy a second property. For example, when taking up a second mortgage, financial institutions would only grant a maximum mortgage loan of 45 per cent on the purchase, and the mandatory cash down payment on the property increases to 25 per cent. There are also regulations that govern the amount of money from the Central Provident Fund (CPF) that the owner would be able to utilise on the property, and additional buyer’s stamp duty also kicks in.

In addition, you would also have to understand how your existing mortgage affects your total debt servicing ratio, which ultimately affects your loan eligibility. You will realise quickly that purchasing a second property for investment would put quite a strain on your cash position. There are ways to alleviate some of the drains in cash flow for your next purchase, but this involves forward planning right from the day you purchase your first property. One of the aspects to consider in this case is the manner of holding.

5) Deciding on a suitable manner of holding

The manner of holding refers to the way the property is owned, specifically with regard to the title deeds and legal ownership. Often overlooked, the manner of holding is especially important to consider when it comes to estate planning or future plans for the property. For instance, depending on whether the property is held in a joint tenancy, or a tenancy-in-common, the property may be automatically transferred to the surviving owner, or certain specified individuals upon the death of one of the owners.

If the owners have different plans for the property in future, such as the transferring of ownership of the property to a single owner, it becomes even more important to consider the percentage of ownership one has in the property and the potential implications it may have when the transfer of ownership is made. Some key considerations that can help to determine the share that an owner has in the property include the amount of stamp duty that is payable, loan eligibility and the amount of CPF money that has been utilised on the property. Failing to properly plan for these items before deciding on the manner of holding may potentially result in the coughing out of excessive cash, or even scupper plans for the transfer entirely.

While interest rates are important, they are not the only determining factor to consider when it comes to purchasing a home or refinancing. Other factors such as home prices, job security and the state of the economy locally and in the US also play a significant role in your overall financial well-being. It is imperative that you take a holistic approach and consider all factors when planning for your mortgage, so that you can reap the benefits when you need them the most.

The writer is associate director at Redbrick Mortgage Advisory.