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Short-term teaser rates might be outweighed by long-term effective interest rates.
Photo by Hans Splinter

Before you refinance your housing loan, please think carefully about all the factors which may be affected. Many of these factors I covered in a previous post. A lot of them will appear in your contract (mostly in the fine print) but I find that very few loan consultants will take the necessary time to explain to you all the fees and terms. At times, refinancing could be a very frugal and prudent decision and at other times, it can mean trading short-term gain for eventual long-term pain. Below is one of many real-time up-to-date loan aggregate search platforms. 

These platforms allow you to compare across all different types of banks and loans within your search criteria. It saves a lot of time instead of going from bank to bank and dealing with a bunch of salespeople. The only thing I really dislike about these is that they emphasise the low teaser rates but don’t give you much detail regarding the after-year-3 interest rates or the other various terms and conditions. But as a starting place, this platform is certainly very helpful.

What They Don’t Tell You
These search platforms are great for getting a general sense of what’s available. But just like choosing a job, choosing a spouse, buying a car, or anything else that is a long-term commitment, there’s so much more to it than just what is “advertised” on the surface. You don’t want to find something that just works or is a good fit for you for only 1 to 3 years. Although there is no limit to the number of times one can refinance, refinancing does come with a whole host of fees, new terms and conditions, and paperwork. Here are some things loan consultants and aggregate search platforms may not tell you:

  1. Banks generally don’t make money off the interest from the first few years of your home loan (during the teaser period). Although you will be paying them interest, the teaser rates are too low and often are offset by the bank’s expenses (i.e., commissions and overhead). They use a business model often referred to as the “bait and hook” where they offer something for cheap, potentially at their loss, in order to later make a profit in the long run (similar to telcos who offer free or subsidised mobile phones in exchange for a 2-year contract). It is from years 3 or 4 onward in which banks get more substantial returns from your home loan. While you may save $200 per month for the first 3 years, you may actually be worse off in the remaining 22 to 32 years of the loan, depending on the effective interest rate, repayment schedule, and other terms of the new loan.
  1. TDSR may affect you once it comes into full effect on 30 June 2017. When savvy loan applicants ask what the interest rate is after the lock-in period, sometimes the loan officers downplay the higher interest rates by telling their clients, “well, you can always refinance when that time comes!” But when the new TDSR framework comes into full effect next year, fewer people will qualify for a refinance. The paperwork required for a loan under this new framework is also quite rigid and cumbersome. By July of next year, it will definitely be more difficult to qualify for a loan or refinance for many people (unless you’re in one of the exclusion categories).
  1. All projections and repayment schedules assume SIBOR (or any other reference rate) will remain super low. Because these models use current prevailing rates, the projected payment they give (for year 3 and onward) may not be representative of what rates are likely to be in the future. As mentioned in a previous post, SIBOR has been at historic lows for the last 7 years. This, of course, is an anomaly and likely will not last. Historically, SIBOR has been (on average) about 3.5%. Therefore, in year 3 and beyond, your rate might not be 2% (SIBOR + 1%) as indicated by the search results; it might be more than double that!
  1. All banks and loan consultants will tell you they have the best rate. This, of course, is impossible. But it’s not just the interest rates that you should be looking at. As already mentioned, you need to also look at the effective interest rate, repayment schedule, fees, and terms. Don’t just be persuaded when one mortgage broker tells you he’s got the loan package with the best rate. Mortgage brokers and loan officers are compensated based on a percentage of the loan amount. This commissions-based model often gives rise to a conflict of interest since commission may differ depending on the bank and loan package. Unlike US CERTIFIED FINANCIAL PLANNERS™ who are fiduciaries to their clients (i.e., they must act in their client’s best interest), loan officers only need to fulfill “suitability” requirements when they sell products. The amount of commissions, therefore, may take precedence over suitability when a broker suggests one loan package over another. Some companies, such as iCompareLoan try to remain independent and objective when helping you choose an appropriate loan.
  1. The fees are not generally displayed in search results. These aggregate search platforms attract you with their teaser rates, but the effective interest rate (after year 3) is often hidden or in very small print. Other fees, such as redemption costs, legal fees, valuation fees, cancellation fees, etc. are very seldom advertised. Instead they will advertise the savings you get, but that usually does not take into account the amount you’ll need to pay (in fees) in order to get those savings. It’s akin to the steep membership fee you’d pay to be a member of a swanky country club just so that you can get that 10% discount on their lunch specials.
  1. The mortgage advisor industry and loan products are NOT regulated under the MAS Financial Advisers Act. This means that some brokers or loan officers may not have much financial knowledge or the right financial knowledge. There are associations that certify mortgage advisers but it is not a regulatory requirement for loan consultants. Loan products are also not regulated by the MAS FAA.

In Summary: Taking up a home loan or refinancing is a big decision and should not be made hastily based on advertisements, teaser rates, or gifts. These aggregate home loan search platforms do a great job in showing you different options, but too often they emphasise teaser rates and potential savings while the effective interest rates, fees, and other terms and conditions are often hidden or in fine print. However, they are a good place to start if you’re just browsing to get a feel for what the home loan market has to offer. Make sure when you enquire about any package, to seek 2 or 3 options preferably from different loan consultants. And do ask them to explain all the fees involved and other terms and restrictions. Lastly, one resource I would recommend is Money Sense’s brochure on “Key Questions to Ask the Bank Before Taking a Home Loan” which can be found here.

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