Ravi Chandran
Switching banks is not a dirty word when you can save money with a new home refinancing package
Refinancing can be quite a daunting word, considering for most people this involves meddling with one of the greatest commitment in their life; a mortgage loan. Generally everyone has a notion that refinancing a mortgage loan involves a lot of hassles and paperwork, usually involving a hand or a leg.
Contrary to the above, getting a new home refinancing package is now a breeze. It’s done in 3 steps; Fill in application form; email documents; sign Letter of Offer. Yup, it’s that simple! Not sure of the exact steps?
SORA-based loan packages how does it affect you?
In the past years, a big proportion of the mortgage loans taken out were based upon SIBOR. Bank floating rate packages are mostly pegged to SIBOR, which resulted in cheaper interest rates. A number of mortgage loans issued then were based upon the artificially low interest rate to attract home owners. Therefore when interest rates rose back, some clients encountered difficulty paying back the sudden jump in mortgage loan monthly repayments. Even getting a new home refinancing package was little help.
This was one of the reasons for the Singapore government’s introduction of multiple cooling measures in the past years to try to insulate against an interest rate shock. But things are starting to change with banks moving to SORA-based loans.
An online survey conducted by UOB in January said that more than 60 per cent of property loan customers say they are drawn to the stability of SORA-based interest rates.
But what is SORA?
SORA is an interest rate benchmark based on the average rate of unsecured overnight interbank Singapore dollar transactions brokered in Singapore. The financial industry in Singapore has intensified a coordinated shift to SORA this year.
Financial institutions, including banks, will cease to reference the Swap Offer Rate (SOR) in new products by end of April 2021 and actively help their customers with legacy SOR contracts transit to SORA. The use of SIBOR in new loan products will also cease by end of September 2021 to reinforce the shift for the Singapore dollar financial markets to a SORA-based interest rates market.
Mr Paul Ho, chief officer of iCompareLoan, said: “Customers who prefer the 3-month Compounded SORA home loan will benefit from the availability of the Compounded SORA rates that MAS has started to publish since 5 August 2020, which provides users with a transparent and convenient reference to track their loan rates.”
“If they don’t understand the difference between terms like SORA, SIBOR and SOR, it is best if they speak to a loan consultant to understand the differences better,” he added.
Subsidies
Banks usually provide some form of subsidy for home refinancing package so these will help to defray and incentivise clients to shift the loan to them.
Most of these subsides are in the range of 0.2 to 0.4% of the loan amount, which covers a substantial portion of the legal and valuation fees. Be careful when selecting packages, some banks may have the lowest interest rates but offer no subsidies at all. An example is denoted below:
Bank A (No Subsidies)
Loan Size: $1,000,000
Tenor: 30 yrs
Existing Interest Rate: 2%, Monthly payment $3696.19
New interest rate 1.5%, Monthly payment $3451.20
Legal Fees: $2500
Valuation Fees: $500
Total savings excluding costs: $244.99 per month, $2939.88 per year.
Total savings including costs: $2939.88 – $3000 = (-$60.12)
Bank B ($2500 legal subsidy, $500 valuation subsidy.)
Loan Size: $1,000,000
Tenor: 30 yrs
Existing Interest Rate: 2%, Monthly payment $3696.19
New interest rate 1.75%, Monthly payment $3572.43
Legal Fees: $2500
Valuation Fees: $500
Total savings excluding costs: $123.76 per month, $1485.12 per year.
Total savings including costs: $1485.12 – $0(Subsidized) = $1485.12
As the above sample case illustrates, Bank A although offering lower rates, without the subsidies it wouldn’t make sense to refinance to them at all. Bank B had a higher interest rate, but with the subsidies, you will still save quite a tidy sum in the end.
Do bear in mind subsidies come with a claw-back clause, usually 3 years. Meaning you must stay with the bank for 3 years, failing which you have to repay the subsidised amount.
With the above, it simply makes sense to take up a 3 year fixed rate as compared to a 2 year fixed rate, as the subsidy clause will bond you for 3 years to the bank in the end. If you are interested in refinancing to a 3 year fixed rate with subsidies, you should speak to a mortgage specialist.
What to do now?
Currently a lot of people are scrambling for the safety of fixed rate packages. In hindsight, people now understand the impact floating rate packages have when the market moves against them. This is why you should speak to a mortgage specialist to get a quote on the various fixed rates before you start on that new home refinancing package.
