Recently, the cheap cost of borrowing, a result of interest rates heading south, has led to more home owners opting to refinance their mortgages to enjoy savings.
Mortgage consultancy portal www.HousingLoanSG.com has seen a surge of at least 50 per cent in refinancing activities.
At HSBC, the volume of refinancing applications has grown more than 50 per cent in the last three months.
The reason for this trend is the big drop in the Singapore Interbank Offered Rate (Sibor) in the last 18 months from as high as 3.5 per cent to about 1.2 per cent currently.
Sibor is the benchmark rate used by banks to determine mortgage rates for home loans. It is the cost at which banks borrow funds from one another.
The drop in Sibor means that those who took up a housing loan one to two years ago are likely to enjoy significant interest savings if they refinance now.
Refinancing should be considered only when there are no plans to sell the property in the short term so as to avoid paperwork and potential costs.
Pegged rates versus fixed rates
With Sibor falling steadily, it is not surprising that many customers are opting for new Sibor-linked packages or refinancing from a fixed-rate package to a Sibor one.
Still, some customers are confused when faced with a choice of a three-month or a 12-month Sibor-pegged home loan package.
Choosing the 12-month Sibor-pegged package is as good as fixing the interest rate for a year.
Customer enjoys greater certainty or lower volatility with a 12-month Sibor package than a three-month package.
However, the 12-month Sibor rate is typically 0.5 per cent higher than the three-month Sibor = thus equals paying out more interest.
New home loan packages
MortgageOne Sibor
Standard Chartered Bank’s (Stanchart) newly launched MortgageOne Sibor will appeal to those with excess cash.
It comes with an offset feature so that customers can use the interest earned on their deposits to reduce the interest payable on their home loans.
MortgageOne Sibor loans are priced at 0.8 per cent per annum above the three-month Sibor for the first three years.
Customers can enjoy the same interest rate as their mortgage loan on two-thirds of the deposits linked to their loans, subject to a maximum of their outstanding loan amount. The remaining deposits will enjoy an annual rate of 0.5 per cent.
At the same time, they have the flexibility to withdraw their deposits at any time.
Interest-only loans
Some mortgage packages like the DBS Bank’s new interest-only mortgage product launched early this month appear attractive, but experts cautioned that they are not suitable for everyone.
The product allows customers to pay only the interest for the entire duration of their home loan.
The principal amount is payable in one lump sum only at the end of the loan tenure.
The money that would otherwise have formed the principal component of the loan instalments would be available to the customer for investing.
Based on a rate of 3 per cent, a $1 million loan with a 25-year tenure would have a monthly instalment of $4,486.
Of this, $2,083 is paid towards the principal and would thus be available to the customer to meet other needs if he opts for interest-only servicing.
But here’s the potential pitfall. If the customer invests wrongly or, worse still, has no discipline to save and invest, the amount would be frittered away and he still has a loan to pay.
Go for an interest-only loan only under the following situations:
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intention to buy multiple properties and would like to pay only the loan interest and keep every cent possible;
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other alternatives to invest at higher returns; or
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cashflow is very tight.
Consider such a loan package if buying an investment property.
Home owners who opt for such a product would end up paying more interest in the long run compared to conventional loan packages where both the interest and principal components are paid up regularly.
You might end up in financial trouble in the event that property prices correct by say over 20 per cent and plunge him into negative equity.
DBS imposes certain restrictions such as allowing home owners to borrow only up to 70 per cent of the property purchase price.
