Should You Refinance Your Property Loan In 2020? And Should You Opt For a SORA-Pegged Home Loan Now?

The practice of mortgage refinancing has been a fairly popular tactic used by property owners and real estate investors, especially those who own a property under a mortgage for some years now and are looking to make use of a property's increased market value.

Refinancing activities have risen quite dramatically in recent times. When mortgage rates fall, homeowners turn to the refinancing of their loans as a potentially smart move. However, there are certain things that need to be considered when it comes to refinancing your commercial or residential mortgage loan in Singapore. COVID-19 has left quite a mark on various industries, including real estate. Knowing when and how to refinance your mortgage can make a world of difference, and it isn't always easy to tell.


Your credit can play a role

The basis of refinancing is to apply for a new mortgage for your property to replace the original one already in place. It is generally done to acquire better interest terms and rates. The first loan gets paid off and makes way for the second loan to be created instead of just opting for a new mortgage and discarding the first mortgage. One factor you'll want to consider is your credit history. If a borrower has good credit history, then refinancing could be a smart way to convert variable loan rates to fixed rates. This helps you obtain a lower interest rate. However, if borrowers have less than ideal or clearly bad credit, then refinancing can be a risky decision. An excessive amount of debt will not go well when applied to the refinancing process.


Mortgage rates are incredibly low now

Federal interest rates have fallen, leading to the subsequent fall of mortgage rates. The fed rate dropped to nearly zero percent recently as a responsive trigger of the economic hit from the COVID-19 pandemic. As a result, members of the Federal Open Markets Committee decided on keeping the rate somewhere between 0 per cent and 0.25 per cent. This has resulted in the current low interest rate climate in Singapore.

Check out the lowest Home Loan Mortgage Rates @ Smart-Towkay.Com.

Many people are of the opinion that 2020 is a great time to refinance their property loan, and they might not be wrong! If you are interested in getting a first-time mortgage or looking to refinance a mortgage that you already have, then now could very well be the time for it. Just be sure that you consult an experienced advisor or someone with expert opinions first.

With that being said, low rates don't stay low for too long, and you should expect a gradual rise by lenders as demand slowly increases. If you find a loan with a low rate, it may be time to act swiftly because demand might push the rates up again and you could have missed the opportunity by then.


Are you suitable for refinancing?

The question that you should ask yourself is: Will this refinancing really benefit me? In essence, low interest rates benefit borrowers the most, and borrowers that are in the right set of circumstances can benefit greatly from this opportunity. However, you might want to examine a few traits about your finances and do your research or talk to professionals before deciding. The sooner this is done, the better.

Some factors you need to consider when refinancing:

1. Timing - Check if your home loan is out of the lock-in period (usually most loan packages will be out of the lock-in period in the 2nd year and that’s when the interest rates will increase exponentially). A rule of thumb is to shop around for the best home loan rates 3 to 4 months before the lock-in period ends, as you will need to serve a 3-month notice period before you are allowed to refinance.

2. Additional Fees - Do take notice of certain fees that you will incur during the course of refinancing, such as legal and valuation fees. Although most banks do offer cash rebates to offset these additional fees, some contracts come with a claw-back clause of 3 years. This means that there will be cases where a contract is out of the lock-in period, but still within the period in which the claw-back clause is active and borrowers will be required to repay the initial legal and valuation subsidies they had enjoyed in the first place. 

3. Total Debt Servicing Ratio (TDSR) - Your monthly debt cannot exceed 60% of your monthly income. Debts include your home loan repayments, credit card bills, car loans, personal loans etc. This is especially important if there’s any expected change in fixed or variable income, as a drop in income might affect your chances of approval for the refinancing.

4. Interest Reset Dates - This clause usually applies to floating packages such as those pegged to the Singapore Interbank Offered Rate (SIBOR) or Singapore Overnight Rate Average (SORA). If a loan is redeemed outside the specific interest reset dates, you might incur penalties for refinancing. For example, if you took up a 3-month SIBOR package in January 2020, the reset dates are 1st of March, 1st of June, 1st of September, and so on. Thus choosing to redeem it on a date outside this period can incur a penalty as
hefty as 2% of the outstanding loan amount, depending on the financial institutions.


5. HDB Loan - HDB owners usually enjoy a fixed interest rate of 2.6% throughout the loan tenure which is often higher than what financial institutions offer. However, do note that once a HDB loan is refinanced to a bank loan, the loan cannot be refinanced back to HDB. Thus borrowers need to be sure of their mortgage commitments as HDB tends to be more lenient towards late payments and default of loan payments compared to banks.

6. Refinancing or Repricing? - Not all refinancing yields actual interest savings for homeowners. If your outstanding mortgage loan amount is on the low side, and the difference in interest rates offer is not that significant, then the additional costs like legal and valuation fees might make the savings negligible and it would actually make better sense to stick to your existing bank and ask for a repricing package. Hence, speak to a mortgage specialist to do a cost-saving analysis for your situation to determine if it is worthwhile to refinance.


There are key benefits of refinancing

The benefit of refinancing often works on a long-term basis. You start saving money throughout a longer period, and it adds up over the years. Mortgages often operate on decades-long terms - commonly within the range of 15 or 30 years. Borrowers can refinance their property loan and save about $200 a month, which stretches on for 30 years. If long-term monetary savings is the kind of added benefit you're looking for, then that is indeed what refinancing can provide. Another crucial point is that refinancing can help to lower your monthly payments on the property while reducing interest rates as well. If these factors come into play, then it's not impossible to save tens of thousands of dollars on property mortgages over the years.


And with the SORA-pegged home mortgage to be implemented in 2021, how does it impact you?

Singapore Interbank Offered Rates (SIBOR) – the current benchmark interest rate in Singapore – could well be discontinued in favour of the Singapore Overnight Rate Average (SORA) within a few short years. SORA is already slated to replace another widely used rate, the Singapore dollar Swap Offer Rate (SOR), by the end of 2021.

However, the Association of Banks in Singapore (ABS), among other industry groups, has now recommended that the SORA be adopted as a single benchmark interest rate for the local financial markets.


What Is SORA?

SORA is the volume-weighted average rate of all unsecured SGD overnight interbank cash transactions brokered in Singapore. A daily overnight rate is calculated by taking all the transactions of interbank loans involving unsecured funds recorded by brokers for the day and taking the average. SORA is then further derived by taking the average daily overnight rate over a certain number of days.


What Is SIBOR?

SIBOR is the rate that Singapore banks borrow from each other on the interbank market. Every business day, each bank in Singapore submits a borrowing rate which they have assessed for themselves individually. The average of these rates, after removing outliers, is then set as the SIBOR.


SIBOR VS SORA

So why use SORA? In short, it is elegantly simple and transparent. Since SORA is purely derived from data – that of overnight recorded interbank transactions – there is no expert judgement required in the process, making it open to less subjectivity and easier for laymen to understand. This is in stark contrast to SIBOR, where the process for each bank to determine its declared borrowing rate is opaque.

In addition, SORA has been published by the Monetary Authority of Singapore (MAS) since 2005, so there is already sufficient history for market participants to conduct data analysis and model trends. Click here to see the historical trend

Ultimately, SORA is of comparable volatility to SIBOR and it benefits both consumers and banks to adopt a uniform interest rate benchmark; the former can compare different loan packages more easily and the latter face lower risks than when offering different financial products based on different interest rates.


When Will SORA Be Implemented?

SORA-pegged loan options are very limited right now, but as previously stated, it is slated to replace SOR by the end of 2021. SIBOR is also set to be discontinued by 2024. This means that realistically, SORA should be set to become the preferred benchmark borrowing rate within the next 2 years.


Check out our daily updated SIBOR/SOR/SORA rates here!

As of 09/09/2020



Shop for options

If you have made up your mind that refinancing a property loan is your next move, then consider shopping around for loan options.

At Smart-Towkay.Com, we publish the latest home loan rates and borrowers can easily compare and apply for the best preferred package, be it Fixed or SIBOR / SORA - pegged rates.

The best part is that these services are FREE as we get our referral fees from the lenders. Thus whether you are looking to refinance your HOME LOAN or your COMMERCIAL PROPERTY LOAN, let us do the legwork for you!

 

Read also: 5 Important Factors to Consider When Applying for a Mortgage Loan in Singapore 2020
Read also: COVID-19: Waiver Of TDSR For Deferment And Refinancing Of Mortgage Payment 2020

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UPDATED AS OF 29 Oct 2020
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