How Can You Save Money By Refinancing Your Mortgage?

Singapore has benefitted from low mortgage rates for almost 10 years. However, this situation is about to change, due to certain events in the United States. Here’s how your mortgage is likely to cost you more, and how you can save by refinancing…

Why are mortgage interest rates rising across Singapore?

In Singapore, many home loans are pegged to the Singapore Interbank Offered Rate (SIBOR). This is the median interest rate among major local banks. If you were to go back about 10 years, the SIBOR rate was below one per cent – it was possible for many mortgages to have rates as low as one per cent per annum.

(By comparison, HDB loan rates are 2.6 per cent).

Today, however, SIBOR is almost double what it was 10 years ago. The typical mortgage rate now is two per cent, and it’s steadily climbing. It is also improbable that it will fall as low as it was 10 years ago.

The reason is the Global Financial Crisis, which occurred in 2008. After the markets collapsed, the United States Federal Reserve (the Fed for short) decided to stimulate recovery, by setting the interest rate to zero.

In Singapore, SIBOR fell in tandem, and mortgage rates became super low for the next decade.

However, the Fed cannot keep interest rates low forever (it risks causing runaway inflation). As such, they have slowly been hiking the interest rates, in small increments of 0.25 per cent. As they “normalise” interest rates this way, mortgage rates in Singapore will rise as well.

As such, Singapore homeowners with an outstanding mortgage can expect to pay more.

While there’s no way you can change policies in the US, you do have one other option to keep costs low. That’s to strategically refinance your home loan.

What is refinancing?

Refinancing is the process of transferring your mortgage to another bank. In essence, the other bank pays off your current outstanding home loan, and you now owe the new bank instead.

(E.g. if you transfer your home loan from Standard Chartered to DBS, then DBS pays off your loan to Standard Chartered, and you now pay DBS for your mortgage instead).

The reason for doing this is that, at any point in time, only a handful of banks will have the lowest mortgage rates. The idea is to find the banks with the best rates, and refinance to them so that you save money.

(Note that there is no advantage to using a bank with a higher interest rate; you just pay more money).

Banks tend to offer lower interest rates for the first three years, and then a higher interest rate on the fourth year and beyond. As such, it can pay to start scouting for cheaper loans close to the fourth year.

How much money can you save by refinancing?

Say you take a loan of $1 million, over a 30-year loan tenure. Your current bank charges an interest rate of 2.2 per cent. Your monthly loan repayments will be around $3,797 per month.

However, you spot another bank, with an interest rate of 1.8 per cent. If you refinance into this other bank, your monthly repayments would shrink to roughly $3,597 per month.

This may not seem like much on a monthly basis, but it can accumulate to a substantial difference over a period of years. Also, remember that interest repayments eat into capital gains. Should you eventually resell your house, any returns are diminished by the years of interest you’ve paid.

Besides refinancing into a cheaper loan, you can also consider refinancing into an FHR loan

A Fixed Deposit Home Rate (FHR) loan is an alternative to a SIBOR loan; these types of loans did not exist until 2015.

With FHR loans, your mortgage interest rates are pegged to the bank’s fixed deposit rates, instead of SIBOR. Your rates will still go up as interest rates rise; but they will go up slower than SIBOR-based loans.

This is because the interest rate is set internally by the bank, instead of using the median rate among multiple banks. And to raise your mortgage rate, the bank would have to pay out a higher amount of interest (making them disinclined to do so).

If you got your home loan before 2015, you might want to consider refinancing into an FHR loan as an alternative.

Finally, remember that mortgage insurance is vital, regardless of how interest rates move

Whichever mortgage you use, always ensure that you have the right mortgage insurance.

This ensures that, in the event of death or permanent disability, your outstanding home loan will be paid off. This is a more important form of protection than chasing a slightly lower interest rate.

Besides, mortgage insurance seldom amounts to more than a few hundred dollars a year. Refinancing to a cheaper loan can be enough to more than pay off the insurance premiums.

You can get the best deals for mortgage insurance by contacting us today.

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