home money
Refinancing is all about costs versus benefits.
Photo by Mark Moz

For the first time in decades, the SIBOR rates (these affect your mortgage loans) rose significantly higher than LIBOR rates (which implies that interest rates in Singapore can go up as a result of factors other than what the US Fed does). SIBOR stands for Singapore Interbank Offered Rate and is a daily reference rate based on the interbank interest rates at which banks lend to one another.  At 1.06% (3-month April SIBOR), this key benchmark rate is 2.5 times higher than the 0.4% in 2014. As mortgage loans are priced according to SIBOR, this is causing many people to wonder if it’s time to refinance in hopes of seeking a lower interest rate. But you don’t get something for nothing (at least not typically in the financial industry) so you need to consider the costs versus the benefits. Lenders, loan officers, and bank advertisements will entice you with interest rates, but what they never advertise is all the fees and restrictions. Here’s a countdown of some things to consider before happily handing over your signed loan documents to an eager loan officer.

  1. PENALTIES – When you’re refinancing, you’re basically paying off your original loan (from bank A) with another loan (from bank B). If you’re still in the lock-in period from your original loan, you could be subject to prepayment penalties and legal clawback, both of which can be very, very steep. Also, keep in mind that the new loan you take up may also have a lock-in period with penalties, and that while we cannot clearly anticipate the future, you should be very sure that your intention is to keep the loan for the duration of the lock-in period. If you’re life, family, or employment circumstances are erratic, then you should think twice before locking yourself in for a set amount of time.
  1. FEES – With refinancing, there are upfront fees, and since 2013, fewer banks offer subsidies to cover these fees, while those that do offer subsidies have been more restrictive.
  • Valuation Fees
  • Legal Fees
  • Stamp Duty
  • Disbursement Fees for Preparing of Loan agreement or Re-pricing Admin Fees (in the case of switching to another loan package from the same bank)
  • Other Fees, such as the Breakage Fee and Cancellation Fee (read and reread the fine print!)
  1. BREAKEVEN POINT – How much will you be spending in order to save on interest payments? If you’re paying $5,000 in fees/penalties to save $100 per month, that means it will take more than 4 years (50 months) to make the savings from the new loan to offset the upfront cost of refinancing. If you sell your home before the breakeven point, then you might have been better off sticking with your original loan.
  1. INTEREST AFTER TEASER RATE – Like your original loan, your new loan will likely have low fixed initial “teaser” rates followed by a big jump in interest rates afterward. Don’t just look at the teaser rates, you must also consider the eventual rate that you may be paying, keeping in mind that SIBOR has historically been at a much higher rate than it is today.
  1. TDSR – Since 2013, your Total Debt Servicing Ratio (including unsecured debt such as credit card debt, personal loans, and car loans) needs to be under 60%. This means that some people may flat out not qualify for refinancing (if they don’t fall into the exemption categories). This new framework also makes other lending criteria more strict, such as income requirements, Loan-to-Value ratio limits, what can be pledged as assets, and the use of an income-weighted age computation instead of basing the loan on the youngest applicant’s age.
  1. WHO’S GOT YOUR BACK – Mortgage consultants, loan officers, and lenders are not your friends. Nor are they appropriate financial advisors. Yes, they do and will give financial advice, but they are not held to the standards of a fiduciary like lawyers are (i.e., those obligated to put your interest above their own interest). Keep in mind that these people earn a hefty commission from your loan refinancing. This is why it’s good to seek more than one loan offer and a second opinion as to whether you will likely benefit from the refinance/re-pricing in the first place.

THE NUMBER ONE QUESTION TO ASK –  Can you really afford your home? The last 7 years have been marked by historical near 0 interest rates. Remember that the SIBOR rate prior to 2008, was at 3.5% (on average) for a very, very long time.  But the era of ZIRP (Zero Interest Rate Policy) has made it possible for many more people to afford larger and more expensive homes, and this demand has inflated many home values (artificially). Keeping that and the historical 3.5% SIBOR in mind, can you afford your home when the SIBOR increases, and you are past your lock-in period? How stable is your family/job/finances/health such that you can withstand a rate increase or an emergency situation? What might it take for you to go into foreclosure or have to resort to a “fire sale”? These are all things no one likes to think about; we all want to believe that the path we are on is one that will continue smoothly and indefinitely. Most of us don’t realise just how close we are to a cliff until we actually see the chasm, but by then it can be too late.

I’ll spend more time discussing some of these considerations in future posts, so stay tuned!

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