With Phase Two open, people are surging back into showflats and banks – but not just to get home loans. Banks have seen long application lines since even before the Circuit Breaker (CB), thanks to everyone rushing to refinance into a SIBOR loan, and maximising their property gains. But before you join the crowd, do take note of a few things:
What is a SIBOR loan and why is everyone rushing for it?
This refers to home loans that are pegged to the Singapore Interbank Offered Rate. As the SIBOR rate rises or falls, interest rates for home loans will follow. At the time I’m writing this, the One Month (1M) SIBOR rate is at 0.09 per cent. For reference, the rate was 1.74 per cent in January!
This was initially due the United States Federal Reserve (the Fed) announcing an interest rate cut, to deal with the Coronavirus. SIBOR will generally move in the same direction as the Fed rate. More recently however, the Fed announced that they would keep the rates at near zero all the way through to 2022.
This has caused many home owners to try and refinance from their existing package into a SIBOR-pegged loan. After all, the less interest you pay for your home loan, the more you’re ultimately making from your property (net rental yield and appreciation will rise, as reduced interest repayments mean lower costs).
Before you rush to do this, there are some important things to take note of:
1. Repricing may be a cheaper option than refinancing
Refinancing means changing your bank. Repricing means that you are switching to another home loan package, but are still staying with the same bank.
Between the two, the fees for repricing are much lower. It typically costs between $2,500 to $3,000 to refinance; but repricing may cost $800 or below. Also, if you check the terms and conditions of your home loan, you may find that you have a free repricing option.
The savings from repricing can make up for a slightly higher interest rate. For example, say your loan is for $1 million at 1.6 per cent, for 25 years. You would currently pay about $4,046 per month.
If you refinance to a bank offering 1.2 per cent, you would pay around $3,860 per month. You would save about $186 per month, at an initial cost of around $2,500. It would take you over 13 months just to cover the cost of refinancing alone.
But let’s say instead of refinancing, you stay with the same bank, and reprice to a loan at 1.4 per cent. Your monthly repayment would be around $3,953, saving you about $93 per month. However, the repricing only costs $800. You would cover the cost of repricing in just 8.6 months.
(If you happen to have a free repricing option, your savings will be even bigger).
2. Never refinance during the lock-in period, as the lower interest rate will not justify the penalty
If there is a lock-in clause on your home loan, it typically applies for three to five years. If you attempt to refinance during this period, the penalty is usually 1.5 per cent of the loan amount redeemed.
For example, if you still have $1 million outstanding, you would pay $15,000 as a penalty. This is on top of paying other refinancing costs, such as the $2,500 in legal fees.
Even if it lowers your monthly repayments by $100 to $200 per month, it would not justify the additional fees you’ve paid. It’s better to wait out the lock-in period before you try to refinance.
3. If your income situation has changed due to Covid-19, refinancing may not be possible for you
When you refinance with another bank, they will go through the entire loan qualification process again. This includes checking your credit, asking for your income documents, and ensuring that you meet the Total Debt Servicing Ratio (TDSR).
Under the TDSR, your maximum home loan repayment – inclusive of all other debts – cannot surpass 60 per cent of your monthly income.
Importantly, you should know that banks apply an interest rate of 3.5 per cent when determining if you pass the TDSR – this is regardless of what the interest rate currently is, so the low SIBOR rates won’t help you to qualify.
If your income situation has changed, such as due to Covid-19 affecting your business, it’s possible that you qualified for the home loan before, but no longer qualify today.
4. If you are trying to refinance from an HDB loan, remember that you cannot change your mind and go back to HDB later
If you’re a flat owner, you can choose to refinance from your HDB loan into a bank loan (and yes, you can still use your CPF to pay for your home loan, even after switching to a bank loan).
The motive for doing this is to pay less for your flat. The HDB Concessionary Loan has an interest rate of 0.1 per cent above the prevailing CPF rate. It has been 2.6 per cent for a long time now, and rarely changes. This is now almost double the interest rates that some banks are offering; many SIBOR loans are now at around 1.3 per cent per annum.
However, you should bear in mind that once you switch from an HDB loan to a bank loan, you cannot change back. While bank loans have been cheaper than HDB loans since around 2009, bear in mind that bank home loans were once at around four per cent per annum (although they probably won’t shoot up so suddenly).
HDB is also known to be more lenient than banks, if you ever need more time to pay the loan.
5. Be clear on your plans for the property before you refinance
If you look at the example in point 1, you will notice that it takes a while for the savings to cover the cost of refinancing. As such, you need to check if your plans for the property justify the cost and effort.
For example, if you’re going to sell your flat and upgrade next year, then there’s no point in paying refinancing costs, for which you’ll take more than 12 months to break even.
You also need to consider that, if you refinance into a home loan with a lock-in period, this could incur penalties when you try to sell the house during that period.
For example, if you refinance into a package with a three-year lock-in, and you decide to sell in two years’ time, you could be hit by the lock-in penalty (unless you’re careful to note features such as partial prepayment penalties, or prepayment penalties that don’t apply when you’re trying to sell. Read the terms and conditions carefully!)
If you’re uncertain whether it’s right for you to refinance, drop me a message on Facebook. If I can understand your overall plans for the property, such as upgrading, then I can better advise you on whether there would be genuine savings when you refinance. It’s a matter of timing it to match your intentions.