Finding the right home loan
SINGAPORE — In these current uncertain economic times, coupled with rising interest rates, looking for the right mortgage loan can put a big frown on homeowners. What is suitable? Should borrowers consider refinancing to a package with lower interest rates? What are the restrictions when refinancing? TODAY finds out.
Interest rates are expected to continue to trend up. Last December, the US Federal Reserve raised its interest rates for the first time in nearly a decade. The Singapore Interbank Offered Rate (SIBOR) and the Swap Offered Rate (SOR) — the two key benchmarks against which the vast majority of housing loans here are pegged against — are expected to broadly move in line with US interest rates, raising mortgage costs.
The three-month SIBOR has tripled from about 0.4 per cent at the beginning of last year to 1.25 currently, while the three-month SOR has risen from about 0.8 per cent to 1.31 per cent during the same period.
With rising market risks, SIBOR is likely to rise even higher this year, said Mr Ku Swee Yong, chief executive of property firm Century 21.
“The fluctuating SIBOR and SOR is due to market turbulence. Now, overnight, the whole world might change. When we wake up tomorrow, the stock markets may be in topsy turvy and the market turmoil causes interest rates to rise. Banks have to add a margin over SIBOR and due to uncertainty, they add a higher amount for safety. Today banks lend at SIBOR + 1 to 1.5 per cent. Overall, mortgage loans are at 2 to 2.5 per cent,” said Mr Ku.
FLEXIBILITY A KEY FACTOR
Mortgages that offer flexibility have been gaining traction, banks said. For example, DBS offers a Managed Mortgage, or combo plan, where half the loan is fixed and the other half on a floating rate package, allowing borrowers to manage their exposure throughout various interest rate movements, said Ms Tok Geok Peng, Executive Director of Secured Lending, Consumer Banking Group (Singapore), DBS Bank.
At UOB, the bank has what it calls SIBORFlex, which allows borrowers to enjoy a 12-month SIBOR rate for the first year and the three-month SIBOR rate for subsequent years.
Borrowers also have the option of extending the 12-month SIBOR rate to subsequent years should interest rates continue to trend upwards, said Mr Dennis Khoo, Head of Personal Financial Services (Singapore) at UOB. “Borrowers are not tied down to a two or three-year rate lock-in period unlike fixed rate packages,” Mr Khoo added.
For HDB flat owners, the POSB HDB Loan caps the interest rates at 0.1 per cent per annum lower than the HDB Concessionary Loan rate for the first five years.
In current market conditions, Mr Ku suggests that locking in a 1 to 3-year package is the best option. But he also cautions: “At current times, this package is best but we also have to be mindful, what will the rate be repriced to at after it’s over?”
For borrowers considering refinancing - transferring a loan to another bank or within the same bank - they can consider looking for options that offer more flexibility, experts said.
OCBC said it offers an alternative refinancing option pegged to their 36-month Singapore Dollar Fixed Deposit Rate. “This benchmark offers transparency, increased stability and flexibility. Should the 36-month Fixed Deposit Rate increase, customers will be able to switch to another pricing package at no cost. Many customers find the additional safety net of one free conversion (to re-price to another package) a huge plus,” said Ms Phang Lah Hwa, Head of Consumer Secured Lending at OCBC Bank.
Amid the weak property market outlook and rising interest rates, banks are also coming up with creative ways to capture more market share. OCBC, for example, has tied up with personal finance portal MoneySmart.sg for a 15-day promotion starting today (MONDAY) to offer a mortgage package.
The loan package is linked to OCBC’s 36-month fixed deposit rate (0.65 per cent), plus 0.98 per cent for the first three years for loan amounts of S$500,000 and above. The package also includes a S$2,000 cash rebate to help refinancing applicants defray legal costs.
Before refinancing, it is important that borrowers consider the current terms in their existing loan and also Total Debt Servicing Ratio (TDSR) restrictions, experts said.
“Some banks charge fees for early redemption before maturity, impose a three-month notice period and so on. The borrower should also understand the terms of the new loan package as some may impose a lock-in period or the interest rate might be adjusted at the bank’s discretion. In addition, there could be additional costs such as legal fees and valuation costs which the borrowers may have to bear for the new home loan,” said DBS’ Ms Tok.
OCBC’s Ms Phang added: “As a home loan is a long-term commitment, we encourage home buyers speak to mortgage specialists to understand the financing considerations before committing to a property purchase. The implementation of the TDSR framework requires a comprehensive assessment of affordability. This is a valuable exercise to aid buyers in making an informed decision, taking into consideration their present and future commitments.
“We also advise home buyers to take a holistic view that goes beyond just pricing. They should consider the overall package which best meets their needs, including the advisory service from the mortgage specialist.”
For borrowers whose loans are currently on a floating basis and are unable to refinance, they must set aside more cash to prepare for the increase, experts advised.
“In a rising interest rate environment, borrowers whose home loan rates are on a floating basis will have to pay higher interest. As monthly repayments for home loans form a large part of monthly household expenses, it is important for borrowers to look at their cash flow and start to set aside more cash to prepare for higher monthly instalments,” Ms Tok said.