Ravi Chandran
Fixing mortgage now is important before your home loan becomes more expensive.
The Federal Reserve is expected to order another super-sized jump in interest rates today, as it tries to put the brakes on runaway prices. Markets are projecting that the central bank will raise its benchmark interest rate by 0.75 percentage points, following similarly large rate hikes in June and July. The biggest interest rate hike in two decade by Fed will have an impact on all kinds of loans – from credit cards, to car loans, to home loans.
Mr Paul Ho chief officer at iCompareLoan said, “how the FED interest rate hike works is by making loans more expensive and technically, should lead to reduced spending.”
“The move will put pressure on Singapore’s financial institutions to raise interest rates as well,” he added.
This is why fixing mortgage now is important because all these raises will have an impact on your home loan.
As most home loan rates are now pegged to SORA, you will not see interest rates prematurely rising too out of step with the US Fed Funds Rate. This is because although SORA is a “backward”-looking interest rate mechanism which reacts to interest rate movements in Singapore, changes to the US Fed Funds Rate has global repercussions, so SORA is expected to react accordingly.
The biggest interest rate hike in the US will definitely dent some of the enthusiasm in the buoyant property market, and 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 SORA.
If you want to refinance your mortgage loan you must be curious about how SORA, or Singapore Overnight Rate Average, works.
SORA basically uses a volume-weighted approach where the average rate of all actual transactions traded and booked in the unsecured overnight interbank SGD cash market in Singapore between 8 am and 6:15 pm. The phrase “volume-weighted” simply means that the calculations consider the actual amount being lent.
Which means that a 3M compounded SORA rate is based on a compounding period of 3 months of the historical SORA rate which is published daily on the MAS website and a 1M compounded SORA rate is based on a compounding period of 1 month of the historical SORA rate which is published daily on the MAS website.
Mr Ho said, “All these terms, 3M, 1M, fixed rate, floating rate, etc can be confusing to some home owners who want to refinance. And also there may only be a short window of opportunity open if you want to refinance your mortgage loan.”
He added, “So, anyone who wants the best home loan should speak to mortgage consultants as they can get the best rates for home owners who want to refinance their home loans by comparing across 16 banks and financial institutions. The have the latest home loan info to guide home owners to make the right decision and best of all, their services are free.”
What are some reasons which will bring you to fixing mortgage now?
During a low-interest rate climate, savvy borrowers may prefer to capitalise on low interest payments by taking a market-pegged interest rate variable package. But when these borrowers are (like now) hit by the biggest interest rate hike, they may try to change the loan to a fixed rate package for some years so as to be able to lock in lower rates and better manage their cash flow.
Fixed rate packages are usually more expensive, but provide the most stability as rates are kept fixed for up to the first 3 to 5 years of the loan tenure. There is no perpetual fixed rate being offered by banks in Singapore at the current moment. This is where a refinancing guide can be useful to home owners to read-up on remortgage and be knowledgeable about the entire process.
Today, consumers have a wide range of home loan packages to choose from compared to several years ago. Home loans could also be tied up with other programmes which rewards customers with a higher interest rate on their deposits if they transact more with the bank, such as getting a home loan and crediting their salary with the same bank.
Typically, with mortgage loans you are offered attractive rates for the first three years when you refinance – following which the interest rates are adjusted upwards. This usually coincides with the end of the lock in period, offering borrowers a good opportunity to relook their loans.
But is there such a thing as a bad time for fixing mortgage?
If home owners are planning to sell their home within a few months, it is usually unwise to refinance. This is because it takes some time before the savings exceed the costs of refinancing. Secondly, they may incur the penalty of the clawback period or lock-in period of the refinanced loan or legal conveyancing fees, valuation fees and other incidental fees.
In an environment of rising interest rates, buyers of investment properties should especially exercise caution as it may curb the rise in property prices in Singapore. The rising interest rates, if coupled with the weak rental market, may impact the buyer’s ability to service the mortgage on a property.
Mr Ho said, “there may be a short window of refinancing opportunity for homeowners who are trying to avoid higher interest rates to to get the best refinancing rate, but they must grab it when they see it.”
He added, “mortgage consultants can get the best rates for home owners who want to refinance their home loans by comparing across 16 banks and financial institutions – and best of all, our services are free.”
Not shopping around for the best home loan, could be the biggest mistake home owners could make, which would keep them trapped without refinancing or mortgage reprice opportunity.
