Are You Paying Less for Your Home Loan Now?

Since I was examining my home loan recently, I decided to write something here as a reminder to my friends and readers out there. Particularly for parents are fully occupied with WFH, parenting and housekeeping, all at the same time. You probably are left with no time and energy left for anything else.

In case you are not aware, you will be happy to know that the SGD interest rate has plummeted since March 2020, and 3-month SIBOR is only 0.56% as at 30 June 2020, as compared to 2% a year ago. Check out the graph below for a bird’s eye view of the 1-year interest rate trend.

What Does Low-Interest Rate Mean to Families with Home Loan?

A low-interest-rate environment is a good news!!! When families like ours are laden with property loans, we want to reduce the debt burden as much as possible. And lower interest rate means a lower monthly loan instalment!

BUT WAIT! Are you benefiting from the lower interest rates?

Check your existing loan agreement. Check your loan advice. What is your interest rate benchmark?

A typical interest rate will include a base rate and a credit margin.

Is your interest rate based on a transparent floating base rate such as ABS SIBOR that you can easily find from the newspaper or internet? Click here for ABS SIBOR rates.

OR is your home loan fixed-rate, or based on some board rate arbitrarily and unilaterally created by the lending bank that is currently far off from the current ABS SIBOR rates.

When to Refinance Your Home Loan?

If your current loan interest rate (base rate plus margin) is much higher than what is currently offered by banks, you probably need to consider to refinance your home loan.

Just to give you an example, the floating loan rate offered by HSBC is SIBOR plus 0.75% from the 4th year onwards, meaning the all-in loan rate is 1.31% (0.56% + 0.75% ) as at 30 June 2020.

Let’s look at a simple comparison using the all-in rate of 1.31% and based on an HDB property loan of $400,000 with a remaining loan tenor of 25 years.

Just look at the difference. Go fiddle with the Monthly Instalment Calculator from the CPF website to determine if you should refinance your existing loans.

Also note that the above calculation is based on SIBOR, which FLOATS. It will fluctuate from time to time though the market is likely to remain in a liquidity trap for a long while. With COVID-19 in the picture, we are probably facing the worst global recession after the Great Depression. So I personally think interest rate will stay low for the next one to two years at least.

Thus if I am to refinance my obligations, I will opt for a floating rate instead of fixed-rate, which is often significantly higher than a floating rate. Using HSBC as an instance again, its fixed-rate loan is 1.85% for the first three years, and from the 4th year onwards, its loan rate will switch to SIBOR + 0.75%. This means the base rate of 1.1% is double of SIBOR.

Before You Refinance, Look Out For…

Before you refinance your home loan, do check out if you are still bounded by the lock-in period. The penalty imposed by banks for early prepayment is potentially hefty. Do check if it is worthwhile to fork out a huge sum of money for the sake of a supposedly cheaper loan.

I also want to remind you that banks’ maximum LTV (loan-to-value ratio) for property loans has been reduced to 75% since 2018. If you are refinancing your HDB loan, which has a maximum LTV of 90%, you will want to make sure that you can fulfil the new LTV criteria. But don’t overly worry about this part. Ask your mortgage banker to run a quick check for you before you proceed with more paper works.

Click here to check out for the best property loans.

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