Home loans... this is a major part for a property owner in Singapore. If you had bought a private property, you can only take a bank loan whereas for a HDB property, we can choose between a bank loan or a loan from HDB.
Bank loans are structured in a way where if we do not refinance regularly, we will lose out on a lot of cost savings and end up paying more for our housing loan instalment. Many banks do not reveal that to you. It is like credit cards where they give you waiver of annual fees for first few years and start charging you later if you do not realise it. Some are smart enough to call in and cancel the card or request the fees to be waived. Others will end up paying the extra fees unknowingly.
How does bank loan work?
For every loan package, there is a spread applied to the interest rate. If it is a sibor package, it will be something like "sibor + 0.8%". I've talked to many people before and some don't realise the rate that they are paying now is just temporary. Most of the time, after a few years (likely 2-3 years), the spread will increase. Instead of 0.8%, the spread increases to 1.2%. Some can even increase as much as 1% which is a significant amount on our loan installment. It will be a shock when we realise we have to pay a few hundred or thousands more per month later.
Here are some tips on refinancing and when we should do it:
You should refinance as early as 6 months before lock in expires
Refinancing should not be done only when we see an increase in our loan instalment after the spread increases. We should refinance and get a better package even before our lock in expires. Yes this can be done and it can be done as early as 6 months before.
The reason to refinance before lock in expires is simple. The minimum notice period for refinancing is 3 months which means if we only refinance after our lock in period expires, where the loan instalment will be higher, we will be stuck with the high interest rates for at least 3 months. 3 months can be a few thousand dollars paid in extra by then.
The different variable rates to choose from
For loan packages, there are both fixed and variable rates. For variable rates, there are different options to choose from again. This is the confusing part for many people and sometimes I have to explain for quite awhile before people can understand the options available.
For variable rates, there are mainly 3 types:
- Bank's board rate
- Sibor/SOR rate
- Fixed deposit mortgage rate
As mentioned earlier, for home loans, there is a spread. For variable rates, it will be pegged to either one of the above variable factors. Thus, it can be either "board rate + 0.8%" or "sibor + 0.8%" or "fixed deposit mortgage rate + 0.8%".
For bank's board rate, this is the most NOT transparent among the 3 types. The bank can change the rate as and when they want and then tell you your loan instalment will be higher the next month. There is no way we can check or see the rate for this.
For sibor/sor rates, it is transparent and all banks follow the same rate. However, the rate can change quite a lot base on historical figures. It was as high as 8% in 1987, 7%+ in 1998 and almost 4% in 2007. Every financial crisis causes the sibor to fluctuate quite badly.
For the fixed deposit mortgage rate, this is a relatively new type as compared to the bank's board rate or sibor/sor rate. This is also a transparent rate as it is pegged to the fixed deposit rate and we can see the rate published on the website of that particular bank. Many people are sometimes confused that this is a fixed rate. It is not a fixed rate. This rate is also less volatile as compared to the sibor based on historical figures. In any case, increasing the fixed deposit rate does not benefit the bank as it is also a cost to them.
Fixed rates only for short period of time
If your loan is on fixed rates, do not believe that your rate is fixed forever. There is no such thing as a long term fixed rate which means if you want fixed rates for longer term, you should refinance regularly. Most fixed rates are for 2-3 years with some extending to 5 years but that's about it so far from what I have seen among all the banks in Singapore.
Once your fixed rate ends, it will revert to a variable rate so it is better to refinance to get fixed rates again.
Should I switch from HDB loan to bank loan?
So far, we have discussed mostly on bank loans. If you're on HDB loan, the interest is 2.6% whereas if we switch to bank loans currently, it can be as low as 1%. However, switching to bank loans will have a huge consequence. The main issue is we would not be able to switch back to HDB loan once we go over to bank loans.
HDB loans, although it is higher at 2.6%, but it is liken to a long term fixed rate as the rate has not changed for a long time. If we want more stability, we should stay on HDB loan.
However, if our loan is left about 5-10 years, we can consider switching to bank loan to take advantage of lower interest rates and not worry too much since the loan is going to end soon.
What are the fees for refinancing?
Refinancing is not free. There are fees involved which we should take note of. However, if our loan amount is high, the banks will always give cash rebates or subsidies to cover most of the fees.
The fees for refinancing are as follow:
- Valuation fees
- Legal fees
- Mortgage stamp duty
In most cases, cash rebates and subsidies can cover most of the cost which means we only need to pay less than a few hundred. Do note that all fees can be paid by CPF so no cash is needed as long as we have enough in our CPF Ordinary account.
This article first appeared on SG Young Investment.