Increasing mortgage rates: Keeping up with the market

Singapore’s residential property market has indeed shown rapid signs of recovery so far this year (2018). However, the bullish performance of the market as well as the economy has sparked concerns of an ever-increasing interest rate. Currently, interest rates have risen substantially and thus, although not at a rate where there is a source of alarm, homeowners are paying more for their mortgages. As such, in anticipation of rising mortgage rates, now may be a good time to think of countermeasures to this rising costs of borrowing.

It is without a doubt that a mortgage loan is perhaps one of the biggest as well as most essential financial transactions that most of us will ever make. Choosing the right property might be the first step, but choosing the right mortgage sets the ability to undertake that acquisition. Nevertheless, there are rising sentiments that even if home owners have picked the right loan when they bought their home a couple of years ago, they are slowly feeling the impact of the gradual rise in interest rates.

Current market situation

So why are they feeling the impact only now? The reason is simple – many interest rate packages of mortgages are pegged to the 3-month Singapore Interbank Offered Rate (SIBOR). The aforesaid SIBOR can be simple defined as a daily reference rate based on the interest rate at which banks borrow from one another, or perhaps it simpler terms – floating rate.

Nevertheless, it is important to note that despite the fact that some loans are termed publicly as “fixed rate”, that fixed rate generally lasts for about the first two or three years before it starts to fluctuate according to the movements of SIBOR thereafter. As such, understanding this, right from the start some consumers have selected “floating rate” loans with rates that float from the beginning, with the intention of enjoying the initial lower interest rate.

To give you a heads up on what has been going on; the 3-month SIBOR rate has steadily increased over the years, from 0.45% in January 2015 and 0.99% a year ago to 1.50% in early May 2018, DBS Bank reported.

Furthermore, United Overseas Bank (UOB) even backed the fact that the rate to go even higher within this year, potentially hiking to about 1.7% by June and 1.85% at the end of the year. With general sentiments that the Fed Interest Rate is expected to increase, the aforesaid scenario seems extremely likely. All these increases have undoubtedly caused many mortgages to be more costly. For instance, the monthly payment for a S$500,000, 25-year, floating-rate loan would have increased by about S$120 per month and that is just compared to 1 year ago!

Need for refinancing?

As such, in anticipation of the rising mortgage rates, there perhaps a need for refinancing. As such, there is a need to now mitigate the impact of the increase by refinancing your loan at a better rate and fixing the interest rate for three years.

The first step to this is simply to compare the various mortgage rates and see which loan package has the lowest interest rates as well as the period of it. Nevertheless, please remember that the rates also depend on factors including the amount of the loan, your credit score, as well as the location of your home.
However, if you already have an existing loan, it is imperative to check whether you’re eligible to take out a new loan and how much it would cost to switch. This is due to the presence of prepayment penalties or lock-in periods, amongst other conditions. Also, it is important to verify whether you’re allowed to pay off the costs of the current loan.

If you are unable to refinance or the costs of doing so are too high, then it is not worth looking around. On the other hand, should you be eligible for refinancing, you must look at the interest rate as the key factor; generally, the lower it is the better, although this may not necessarily apply to everyone. Thereafter, you have to check both the promotional rate and the long-term rate, the basis for a floating rate as well as the final value of the loan that the bank will offer. On that note, check out the closing costs, which are primarily all the other additional fees as well to ensure the feasibility in your refinancing target.

Another method which you may consider is taking up a longer loan should you wish to reduce your monthly payment. Nevertheless, it is important to understand that this will be done at the cost of having to paying for a longer period and hence more interest as well.

Concluding Thoughts

Perhaps it’s the convenience, or laziness, or people are generally just unaware. However reality is depicting the fact that most homeowners tend to get complacent and thus maintain a specific mortgage from the same bank even when interest rates are rising. When this happens, remember to keep a lookout for any refinancing opportunities regularly so as to be able to capitalise on an opportunity to shift your loan to a better loan package.

On that note, should you need any advice or wish to refinance your mortgage loan, it is best to contact an established mortgage advisory firm such as Redbrick so as to make your refinancing loan as optimal as possible.

Thomas Chew
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