Should I Refinance My Mortgage? When You Should And Shouldn’t

This is a question that many have been asking themselves. 

While it’s common to encounter ads promoting the lowest rates online and elsewhere, it can be confusing to determine which ones to actually go for and if you should go for them at all. 

Is it wise to look at the lowest rates at face value? 

Is refinancing even the best option for you right now? 

If you’re having trouble deciding whether to refinance your mortgage, this article is for you.

I touch on the upsides and downsides of refinancing, plus some things you might want to consider aside from interest rates.

Also, besides for being a licensed Real Estate Professional, I’m a Singapore Accredited Mortgage Planner (SAMP™).

I’m sure you’ll learn something from this article. 

Keep reading!

Why Refinancing your Mortgage is back in the Headlines

Because the Singapore Interbank Offered Rates (SIBOR) has reached its lowest point in the last 10 years!

To explain, SIBOR is commonly used to determine mortgage interest rates; 1-month SIBOR is currently at 0.254%, just a little bit higher than the last lowest SIBOR value of 0.19% in August 2011, a few years after the 2008 Global Financial Crisis.

Source: Moneysmart

Why you should Refinance your Mortgage

1. To pay a lower interest rate

While some suggest refinancing only if it’s possible to reduce your interest rate by 2%, reducing it by 1% can already be incredibly useful. 

For instance, if you’re past your lock-in period for a loan that you signed two to three years ago for an interest rate just over 2%, or a Housing & Development Board (HDB) loan for a 2.6% interest rate, a difference of 1% could save you around $1000 for every $100,000 in that loan. 

Those are big savings in the long run!

2. To stretch your loan tenure 

 

Because same loan value over a longer period = a lower monthly mortgage repayment amount.

Moreover, if you really want to stretch to the maximum loan tenure (for non-HDB properties) of 35 years, your loan-to-value (LTV) would be only 55%.

Refinancing can help you overcome this and maintain the same LTV.

Why you shouldn’t Refinance your Mortgage

1. Clawback Periods and other conditions in the fine print

Financial institutions (FI) tend to offer cash incentives and rebates to entice clients to refinance with them.

However, clients are often left in the dark about conditions stated in the fine print.

Money you get from an FI to refinance your mortgage normally has a clawback period of three years, which might even be longer than your loan’s lock-in period of two years.

What this means is, you can be ‘locked-in’ to your refinanced loan longer than you think!

I’ve had clients coming to me looking to refinance after their second year only to realise they would have to return the benefits received intitially.

Unfortunately for them, it would wipe out all gains from refinancing, so they’re better advised to stay for another year more with their existing FI.

2. More Interest over time

You can stretch your loan tenure and reduce your loan repayments, but this could also result in you having to pay more in interest over time.

That’s because every time you refinance your mortgage, your repayments begin with a larger proportion of interest that gradually drops throughout the loan period.

To illustrate with the example above, a loan of $500,000 at a 1.3% interest rate for 30 years would start out with interest of $541, but this amount decreases with every repayment.

You’d still be paying the same amount every month, but interest expense is highest at the start of the loan.

When you refinance your loan, you reset the clock and start paying a larger portion proportion of interest again.

It’s important to remember that this occurs every time you refinance.

While it may reduce your monthly payments, you’ll be stuck having to pay off your loan longer than you initially planned.

It’ll take a little while longer until you can say you completely own your home.

Never take Interest Rates at Face Value

Low interest rates aren’t the only aspect you have to think about when considering refinancing your mortgage.

Just wrap your head around the following rate table.

Source: Redbrick

 

1. Different types of interest rates

There are fixed interest rates, which stay constant throughout the loan, and floating interest rates, which change based on its peg. (read 2.)

If you have a mortgage with a fixed interest rate, you’ll be able to confidently know your mortgage installments.

However, they are usually higher than floating rates.

If you are comfortable with constantly changing repayment numbers, and think interest rates would fall further, a floating rate might be more suitable for you.

2. There are different interest rate pegs

Commonly the SIBOR, the fixed deposit rate, or the bank’s own board rate.

SIBOR is the most transparent as the information is readily available on The Association of Banks website or Moneysmart.

The fixed deposit rate which as the name suggests, is the interest the bank pays on their Fixed Deposit accounts.

Board rates are the oldest and most traditional type of mortgage packages. They vary across the banks, as each has their own methodology for calculation.

3. There are different spreads

An interest rate spread is what the lender charges on top of their peg.

For example, 1M SIBOR + 1.1% or 3M SIBOR + 0.85%.

Would it be better for you to take a 1-month SIBOR with a higher spread or a 3-month SIBOR with a lower spread?

These are enough combinations to make choosing the best package not as straightforward as it may seem.

4. Different formulas for calculating rebates and incentives

You may receive very different rebates and incentives depending on which FI you approach, so go over all your options before making a decision.

Refinancing your mortgage based on the lowest rates you can find may seem like a bargain, but you could end up losing potential savings if you don’t take these into account!

Why you may want to work with a Mortgage Professional

If talking about mortgages and interest rates overwhelms you, it may be time to enlist the help of a professional who:

1. Can save you time

Why check each bank’s latest interest rates when you can have someone do it for you? Brokers like us have access to all the FIs in Singapore and constantly stay up to date on their rates.

2. Can save you brainpower

After assessing all the latest rates, we work the sums to see which package would give you the most net savings. Take the time to relax, be with family, or do your best work while we figure out what would work best for you.

3. Has leverage

As brokers, we refer many cases to FIs. The relationships we have built with these FIs over the years can prove useful to your case, expediting matters when required and sometimes even providing insider insights!

The best thing about these services is that they are all FREE and won’t cost you a single cent!

Refinancing can be a good move

When used carefully, refinancing can be of great benefit, but it is only the tip of the iceberg.

A mortgage professional can also help you assess your financial situation and advise on other matters such as equity loans, as well as creative financing solutions and loan structures.

Real estate and loans tend to come hand in hand.

They’re both a journey, and being well positioned from the start will pay dividends further down the road.

Don’t leave anything to chance.

Check out my popular article on the 107 things to consider when buying a house.

Now over to you!

Has this article helped you?

Do you have any further questions on refinancing?

Leave a reply below and let me know!

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