Great Time to Refinance Home Loans, Dennis Ng Business Times

[Dennis Ng]

Hi all,

for the 6th consecutive year, Business Times has asked me to write article on Housing Loans, including my view on interest rate outlook for year 2012.

Please feel free to share with your friends.

Cheers!

Dennis Ng


Business Times - 15 Sep 2011 by Dennis Ng, www.HousingLoanSG.com


Great time to refinance home loans

Interest rates are expected to remain low next year, given a possible further inflow of funds, says DENNIS NG

INTEREST rates on housing loans are at their lowest levels in the last 46 years. Recently, the SOR (swap offer rate) even fell into negative territory, something that no one might have thought possible as it basically means that if interest rates are negative by a sufficient margin, borrowers can end up paying close to zero interest rates on housing loans packages pegged to SOR.

What is the Sibor and SOR?

Sibor, or Singapore Inter-bank Offered Rate, is the interest rate at which banks in Singapore lend to and borrow from one another. It is an average market interest rate announced by the Association of Banks in Singapore daily. The SOR is basically the Sibor factoring in a US dollar to Singapore dollar conversion.

The SOR can be higher or lower than Sibor, but because it involves a US dollar to Singapore dollar conversion, it tends to be more volatile than Sibor and is affected by exchange rate movements.

But, if you hope to pay zero interest rates on housing loans, you are likely to be disappointed because during unusual times, banks could invoke a market disruption clause to change covenants to introduce a floor for interest rates. Other bankers note that a metric that is less volatile than SOR, such as the overnight Sibor, could be used.

Actually, with the latest inflation rate in Singapore at 5.4 per cent, if you pay, say, a 1.4 per cent interest rate on your housing loan, you are effectively paying a negative real interest rate of 4 per cent. You actually gain 4 per cent because the dollar you pay to the bank one year from now is actually worth 5.4 per cent less, while the bank only charges you a 1.4 per cent interest rate.

Thus, low interest rates are good news for borrowers and bad news for savers. Imagine if you earn a one per cent interest on fixed deposits - you are effectively losing 4.4 per cent if inflation stays at 5.4 per cent per year.

Outlook for interest rates in 2012

US Federal Reserve Bank chief Ben Bernanke recently promised to keep interest rates low till 2013. This announcement, and expectations that interest rates would remain low, caused global investors to scramble for US government bonds even when the yield on 10-year US government bonds is now at a historical bottom of about 2.2 per cent.

With inflation in the US currently at 3.6 per cent, it also means that bond investors are effectively losing 1.4 per cent by investing in US government bonds.

So would interest rates stay at current levels till 2013? If the US inflation rate rises to, say, 4-5 per cent, then Mr Bernanke might be forced to raise interest rates to combat inflation. Countries such as Australia, India and China have been forced to increase interest rates in the last year due to rising inflation. With the inflation rate in Singapore now at 5.4 per cent, it is not inconceivable for the inflation rate in the US to go up to 5 per cent in 2012.

Thus, how high inflation numbers would be is the key factor that might affect the US in setting interest rates.

Will housing loan rates stay low in 2012?

The key benchmark for housing loans in Singapore is the Sibor. If you want to know the trend of housing loan interest rates, you should keep a close watch on the movement of the three-month Sibor, as it is used by banks as a gauge of interest rate trends.

If the three-month Sibor continues to rise for a few consecutive months, there is a higher likelihood of banks reviewing interest rates, especially those charged on fixed rate housing loan packages they offer.

The Sibor is mainly affected by two factors, namely the US Fed interest rates and liquidity in Singapore's banking sector. Recently, the SOR dipped below zero because of an inflow of funds into Singapore. Singapore is known as one of the most financially sound countries in the world, so in the face of rising uncertainty in global financial markets, there might be a further inflow of funds, keeping interest rates in Singapore low.

Fixed or floating - what housing loan package to choose?

If you are currently paying a 2.5 per cent interest rate on a $500,000 housing loan, by refinancing, you may be paying about 1.1 per cent instead, enjoying interest savings of 56 per cent.

Interest rates are likely to remain low. Thus, if you share this view, you can consider floating rate packages, such as packages pegged to Sibor or SOR.

If you plan to sell your property within the next two to three years, then you may want to consider home loan packages with shorter or no penalty periods instead.

There are frequent changes to packages offered by banks and at any one time, there might be over 113 different packages offered by 16 major financial institutions in Singapore. Thus, you can consider engaging the services of an independent mortgage broker who can provide you with unbiased analyses and comparisons of home loan packages from all banks. Typically, the service provided is free as banks would pay them a fee separately.

The writer is an accountant by training. He founded mortgage consultancy www.HousingLoanSG.com in 2003

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

[Yew Meng]

Hi Dennis,

For floating rate, other than pegging to SIBOR and SOR, I understand that for some packages, board rate is used.

In your opinion, (assuming the terms/conditions are the same) may I know which package is a wiser choice (peg to SIBOR/SOR) vs (peg to Board rate)? Or are they the same?

thanks,
yew meng

[Dennis Ng]

Hi Dennis,

For floating rate, other than pegging to SIBOR and SOR, I understand that for some packages, board rate is used.

In your opinion, (assuming the terms/conditions are the same) may I know which package is a wiser choice (peg to SIBOR/SOR) vs (peg to Board rate)? Or are they the same?

thanks,
yew meng

Hi Yew Meng,
SIBOR is an average market interest rate, not subject to manipulation by individual banks.

Board rate is set by individual banks, subject to their discretion.

From past experience, they can increase board rate anytime when interest rate go up, but may not reduce board rate when interest rates go down.

[Yew Meng]

Hi Dennis,

For floating rate, other than pegging to SIBOR and SOR, I understand that for some packages, board rate is used.

In your opinion, (assuming the terms/conditions are the same) may I know which package is a wiser choice (peg to SIBOR/SOR) vs (peg to Board rate)? Or are they the same?

thanks,
yew meng

Hi Yew Meng,
SIBOR is an average market interest rate, not subject to manipulation by individual banks.

Board rate is set by individual banks, subject to their discretion.

From past experience, they can increase board rate anytime when interest rate go up, but may not reduce board rate when interest rates go down.

Dennis, thanks a lot for your quick and clear reply. Such information can only be given by someone who is working or has previously work in a bank before!

[Dennis Ng]

MAS is also concerned that Home Buyers are NOT considering the risk and possibility of interest rates on Housing Loan rising in the next few years...

I also sounded the warning when I was interviewed by Channel News Asia:

http://www.youtube.com/watch?v=0gnR6z6s ... re=related

[candy_chia]

Can't even find any Singapore banks that is willing to offer 15-years fixed-rate loan. The longest fixed-rate loan tenure is 5 years in 2011 from Maybank, who had since ceased this scheme as interest rate is at ultra-low rate.

Even for Maybank 5-years fixed rate loan, the interest rate was 2.50% for 5th year (1st year was only 0.88%), really no match for US interest rate of 2.69 for 15-years fixed-rate loan package.


US mortgage rates sink to record lows
Oct 5, 2012 - PropertyGuru.com.sg, By Romesh Navaratnarajah:

Average rates for fixed mortgages in the US dropped to new record lows for the second consecutive week, resulting in a rise in the number of homeowners looking to refinance, media reports said.

According to Freddie Mac, the average rate for 30-year fixed-rate loans fell to 3.36 percent this week from last week’s 3.40 percent, which was the lowest since long-term mortgages began in the 1950s.

At the same time, the average rate for 15-year fixed-rate loans dipped to 2.69 percent from last week’s previous record low of 2.73 percent.

Mortgage rates started falling after the Federal Reserve started buying mortgage securities to boost the US housing recovery, more commonly known as QE3. The central bank will continue the practice until there is significant improvement in the job market.

Moreover, the lower rate is encouraging borrowers to refinance. Just last week, mortgage applications grew by 16.6 percent. Out of those applications, 83 percent were to refinance existing mortgages, according to the Mortgage Bankers Association.

However, some economists are doubtful whether a further decline in loan rates will make a big difference.