Even though more than half of all new mortgages issued in recent years have been for homeowners refinancing their existing home loans, refinancing decision isn’t necessarily the wisest strategy for everyone.
By: Hitesh Khan/
The most important fact to consider for your refinancing decision is whether the savings from refinancing will compensate for the cost of the refinancing itself. If you don’t plan to stay in your home long enough to break even, refinancing could be a mistake.
For those homeowners who have to make refinancing decision, there are several other variables to consider.
For example, although short-term mortgages typically offer lower interest rates than long-term mortgages, they usually involve higher monthly payments. On the other hand, they can result in significantly reduced interest costs over time. There is also a significant difference between a fixed-rate mortgage and an adjustable rate mortgage.
The former allows a borrower to “lock in” a permanent rate, whereas the interest rate on the latter could go up in the future. Always remember to check with your current lender about repricing — your existing relationship could allow you to realize big savings in terms of both time and money.
In past years, Singaporeans seeking to take advantage of low interest rates have lined up to refinance their mortgages — often resulting in significantly lower monthly payments. This may no longer be true as the US Federal interest rate is rising.
One main reason why homeowners should reprice or go for other cheapest rate refinancing packages is because of the rising US interest rates. This is because the US Fed rate hike has an impact on mortgage loans here as Singapore interest rates are closely correlated with those in the US.
The SIBOR (Singapore interbank offered rate) has gone up, and this besides denting some of the enthusiasm in the buoyant property market, could pose a big problem for homeowners who are still servicing their mortgage loans. This is because banks and financial institutions calculate lending rates by adding a margin (which covers their costs and their profit) to a published financial index, like the SIBOR or the SOR.
But while it’s true that refinancing has the potential to help you reduce the costs associated with borrowing money to own a home, it is not necessarily a strategy that makes sense for every individual in every situation.
So before you make a refinancing decision your mortgage, its important to do your homework and determine whether such a move is the right one for you.
To refinance or not is dependent on how long it will take you to break even and whether you plan to stay in your home that long. In other words, make sure you understand — and are comfortable with — the amount of time it will take for your overall savings to compensate for the cost of the refinancing.
Remember — All Mortgages Are Not Created Equal
Don’t make the mistake of choosing a mortgage based only on its stated annual percentage rate (APR), because there are a variety of other important variables to consider, such as:
The term of the mortgage — This describes the amount of time it will take you to pay off the loan’s principal and interest. Although short-term mortgages typically offer lower interest rates than long-term mortgages, they usually involve higher monthly payments. On the other hand, they can result in significantly reduced interest costs over time.
The variability of the interest rate — There are two basic types of mortgages: those with “fixed” (i.e., unchanging) interest rates and those with variable rates, which can change after a predetermined amount of time has passed, such as one year or five years. While an adjustable-rate mortgage (ARM) usually offers a lower introductory rate than a fixed-rate mortgage with a comparable term, the ARM’s rate could jump in the future if interest rates rise. If you plan to stay in your home for a long time, it may make sense to opt for the predictability and security of a fixed rate, whereas an ARM might make sense if you plan to sell before its rate is allowed to go up. Also keep in mind that interest rates have hovered near historical lows in recent years and are more likely to increase than decrease over time.
Finally, before making that refinancing decision, keep in mind that your current lender may make it easier and cheaper to reprice than another lender who would require you to refinance. That’s because your current lender is likely to have all of your important financial information on hand already, which reduces the time and resources necessary to process your application.
But don’t let that be your only consideration. To make a well-informed, confident decision you’ll need to shop around, crunch the numbers, and ask plenty of questions.
How to Secure a Home Loan Quickly
Are you seeking new mortgage loans for your refinancing needs? Don’t worry because iCompareLoan mortgage brokers can set you up on a path that can get you a home loan in a quick and seamless manner.
Alternatively you can read more about the Best Home Loans in Singapore before deciding. Our brokers have close links with the best lenders in town and can help you compare Singapore home loans and settle for a package that best suits your home purchase needs.
Whether you are looking for a new home loan or refinance, our brokers can help you get everything right from calculating mortgage repayment, comparing interest rates all through to securing the loan. And the good thing is that all their services are free of charge. So it’s all worth it to secure a loan through them.
Talk to us if you need refinancing advice.
To speak to our Panel of Property agents.