Refinance your mortgage loan while you still can before interest rates soar

Image credit: Alpha Stock Images

The Federal Reserve has indicated six more interest rate increases by the end of 2022 this year affecting how much you pay for your home loan every month and this is why you should refinance your mortgage loan before that.

refinance your mortgage loan
Image credit: Flickr l GotCredit

You can lower your interest rate by choosing a mortgage rate which offers a better rate than you currently have. You can also consider lowering your payment by stretching out your current balance over a new term, but you must be mindful that age restrictions may apply. And if you do that, you should take heed that it may take longer to pay off your loan.

Even if you monthly payment drops, do keep in mind that the longer you take to clear your mortgage loan, the more interest you will have to pay over the life of the loan. This is the trade-off you have to make between immediate savings and long-term costs.

But if you choose to refinance, you can always choose to accelerate your repayment as your finances improve later in life. There are several reasons why homeowners may think they don’t qualify for a refinance for lower payments. One main reason is, they may believe that their mortgage balance is higher than the current market value of their properties that secures it. The other big reason being, their believe believing that their credit score is bad and won’t qualify them to refinance.

If you refinance to a lower rate, the chances are high that you will end up with a smaller payment. In fact, you can usually refinance for lower payments even if you get a higher rate. That is because in most cases, you will have reset the clock on your mortgage.

Refinance your mortgage loan now because of the US interest rates are rising and will rise further this year.

Interest rates had been at a record low of between the onset of the coronavirus pandemic in March 2020 and December 2021. The rate has been rising incrementally since that time to its current level, with predictions that further increases can be expected throughout 2022.

This is happening because the Federal Reserve has indicated six more interest rate increases by the end of 2022. However, as inflation will eventually start slowing down later this year, mortgage rates may not rise as quickly as they have been lately.

The central bank’s forecast is for the fed-funds rate to reach 2.75% by 2023, which means it would implement 11 total hikes of a quarter of a percentage point each. The interest-rates market, to be sure, is pricing in about 10 hikes—still a lot, and still something that would drag down economic growth.

This is why you should refinance your mortgage loan now 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.

Rising interest rates will definitely dent 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 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 Paul Ho, chief mortgage consultant 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 refinance your mortgage loan?

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 think that interest rates are starting to climb, 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 to refinance your mortgage loan?

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.

Written by Ravi Chandran

Enterprise Financing Scheme allows local businesses right access to cash

refinancing misconceptions

Reasons for refinancing are many, but unlocking cash from your home tops them all