Homeowners in Singapore have been enjoying cheap loans for a long time on the back of historically low Sibor rates. But, like they say, good things can't last.
The Singapore Interbank Offered Rate, or Sibor, to which most homes loans here are pegged, is widely expected to go up when the Federal Reserve raises US interest rates by the end of this year or early 2016.
Already, despite weakening from its last peak in April, the three-month Sibor stands at 0.8159 per cent, twice the 0.4 per cent level it sat in for the past four years or so.
With rising interest rates on the horizon, Singapore homeowners with outstanding home loans might want to think about refinancing them.
If so, here are some key tips to consider:
1. Monitor the loan's lock-in period and pre-empt the hike
Some homeowners only realise when the letter from the bank arrives that their home loan interest rate is due to go up the following month when the lock-in period expires. By then it's already too late to avoid higher payment for a minimum of the next three months due to the notice period requirement.
To avoid this, refinance your home loan four to even seven months ahead of the lock-in expiry.
2. Bargain or switch banks for a better offer
Homeowners should always call their current bank to negotiate for the best refinancing offer, but be ready to look elsewhere for a better deal.
Says MortgageWise executive director Darren Goh: "Banks always give a better deal to acquire a new customer than what they would offer their existing loyal customers. So do not be naïve to think that it pays to stay with the same bank."
3. But find out about all the fees involved in switching banks
Mortgage refinancing is not just about repaying the principal amount.
MoneySmart chief executive Vinod Nair points out that refinancing with another bank usually incurs additional processing and legal fees.
Some homeowners are also not aware that their home loans have a legal fee clawback requirement. If you refinance with another bank before the lock-in period expires - which is usually three years - a legal fee of around 0.4 per cent of loan will usually apply.
"There's also penalty fees involved if you decide to pay up your loan ahead of the lock-in expiry," said Mr Nair. "This is usually around 1.25 to 1.75 per cent of the outstanding sum."
4. Dress up your TDSR
The Total Debt Servicing Ratio requirement - which limits home loans to 60 per cent of a borrower's gross monthly income - has made refinancing difficult for some homeowners.
Some "dressing up" of TDSR is necessary by paying down some other debts, "and it might be a good idea to do it early like a month or two ahead so that it shows up fully paid on your Credit Bureau report," Mr Goh noted, adding that a Credit Bureau report can be printed off its website for a sum of $6.42.
5. Navigate LTV limits
Loan-to-value ratios set out the limit of a property's value that a bank can finance. The ratios are substantially reduced for those with one or multiple existing home loans, but financially capable couples can "de-couple" to raise that limit for second loans.
Mr Goh explained: "It means taking a spouse's name out of the mortgage or out of the property title. If the income of one spouse is sufficient to support the loan, there is no need to have both names on the mortgage. That way, the outgoing spouse is free to take up another loan as a first mortgage and hence get the maximum LTV for a second property."
6. Scenario planning is still key
Ultimately a stress test is still necessary to find out how badly a homeowner will be hit when Sibor goes up by a certain level. This is the key analysis to make before deciding which bank and what rates to take.