For many homeowners, refinancing your home loan is certainly something to consider this year. The Singapore Interbank Offered Rate, otherwise known as the SIBOR, is expected by analysts to increase to 1.8% by the end of the year or early next year, in tandem with the rise of US interest rates.
The present three-month SIBOR stands at 1.07 percent, more than twice the level of approximately 0.4% over the past few years. However, despite the general consensus that SIBOR will go on an uptrend, just how quickly and how much the increase will be is just about anyone’s guess.
Whether or not you want to refinance your home loan, here are a few things aside from the interest rates that you should also consider.
Fixed vs Floating rates
A fixed rate means that your monthly loan repayments do not change, with most fixed rate packages lasting from between two to five years before switching to floating rates. On the contrary, floating rates are revised typically every month or every three months, so your month repayments would vary.
In the past few years when the SIBOR held steady at historical lows, the floating rate has been the easy choice even for those with a low risk appetite. As interest rates are expected to increase, the SIBOR should not be the only factor that determines the type of home loan you opt for. Here are the other factors to be considered:
If you foresee events in the near to mid-term that will impact you financially, such as a family member’s uncertain health condition, or are intending to switch jobs with uncertain income conditions, choosing a fixed rate will enable you to budget with greater certainty and avoid any rude shocks should interest rates rise significantly.
Thus, if financial certainty is your topmost priority, locking in at a fixed rate will enable you to make plans and focus on the other financial variables in life.
- Making regular partial prepayments
Some homeowners would prefer pay off their mortgages as quickly as possible, making use of year-end bonuses or other forms of variable income such as sudden windfalls. Choosing a floating rate loan that comes without a lock-in period will give you the flexibility to make partial prepayments without being slapped by penalties and fees.
If you take on the position that the rise in SIBOR will not be fast and furious, you may want to retain your flexibility by remaining on packages with no lock-in period.
- Market savvy… or not
If you don’t have the time nor the expertise to keep track of the market rates and analyze the impact of interest rates on your monthly repayments, perhaps opting for a fixed rate may be a sensible idea.
Take it as paying a premium for having a peace of mind. On the other hand, if you’ve got your pulse on the market and are no amateur, remaining on a floating rate may not be a bad idea while you watch and wait for any further development on the U.S quantitative easing and the SIBOR.
Total Debt Servicing Ratio (TDSR)
On 28 June 2013, the Monetary Authority of Singapore (MAS) unleashed the TDSR to prevent homeowners from over-leveraging. The TDSR limit is 60% of your gross monthly income.
Some homeowners may find it difficult to refinance with this limit. If you are borrowing more than 60% of your monthly income and want to refinance, review all your debts and start paying off a few of them.
Debt includes your credit card balances, car loans, student loans, personal loans, and even credit term instalment plans with retailers.
Lock-in period- fees and penalties
If your current home loan package’s lock-in period is due to expire soon, you may choose to refinance to a fixed rate for the coming few years in anticipation of an interest rate hike. However, if you’re considering refinancing before the lock-in period is up, you would have to find out all the relevant fees and charges that you have pay. This includes legal subsidies, fire insurance, and valuation fees, which can cost above S$2000.
If you are able to refinance at an attractive fixed rate of below 2% over the next few years, and are confident that the SIBOR will continue to increase in this period to more than 2.5%, then savings from refinancing would most likely outweigh the fees.
Whether or not you choose to refinance, remember that a mortgage is taken out on the long term. The home loan package that you eventually take on should be in line with your financial priorities and needs, and not be solely dependent on interest rates, which is often hard to predict.
To compare home loans offered by the various banks, visit the iMoney Home Loan Comparison page.
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