Home Loans: Should You Lock In Current Rates Before They Rise Further?

We’ve been enjoying ultra-low interest rates for the past few years on our home loans.

However, that is already changing since the start of 2022, with the Federal Reserve increasing interest rates to combat skyrocketing inflation.

The latest increase of 0.75 per cent on 15 June 2022 was the biggest hike since 1994.

As a result, the median mortgage rates across Singapore banks have more than doubled, and you could be paying tens of thousands or more in additional interest.

Property analysts believe that further increases are coming…

So if you haven’t already,

NOW is the time to consider refinancing your home loan to lock in current rates before interest rates rise further.

TL;DR: Should You Refinance Your Home Loan Now?

• Median mortgage rates have more than doubled since the start of 2022. Homeowners should consider refinancing their home loans if they are on a floating package.
• If you have a large floating home loan of about $500,000 or more, switching to a fixed home loan might save you a few hundred to a few thousand within five years.
• If you have a fixed home loan package, consider whether your fixed home loan rates are high enough to offset refinancing costs AND any penalty fees.

But before you refinance any home loan, be sure that you have enough capital to afford upfront costs (~$3,000).

As every refinancing situation is unique, make use of refinancing tools to help you determine if it is worth it, or engage a mortgage broker to help you.

Here are some useful refinancing tools that you can check out:

• Moneysense Mortgage Calculator
• SmartRefi by PropertyGuru
• Home Mortgage Loan Refinance Calculator

What is Refinancing

For those new to this, refinancing is switching out your current home loan for another one (within the same bank or a different bank) to enjoy lower mortgage rates.

This is usually done after two to three years of your home loan as that is when mortgage rates for the typical home loan package will rise.

Costs of Refinancing

Before we delve into how the rate change will affect your loans, let’s address the elephant in the room: the costs of refinancing your home loan.

Most banks require you to pay fees such as legal and valuation fees for refinancing your loan, and these can easily add up to sums above $3,000.

And if you are refinancing during the “clawback” period or before your property is completed, you must also consider penalty fees.

So be sure to have sufficient cash on hand and avoid a dumb home loan mistake.

Moreover, we must consider the “breakeven” point due to the upfront costs.

Upfront costs / Monthly savings = Breakeven Point

Eg. $3,000 / $200 per month = 15 months (before you actually start saving)

In essence, you will only begin to start saving money once your monthly savings overtake your upfront cost.

How Much Will Rising Mortgage Rates Cost You?

Disclaimer: The example below is solely for illustration purposes and is based on a 0.75 per cent interest rate increase. Interest rates may rise or fall in the coming years. Please do your own due diligence before refinancing a home loan.

Let’s say that we are currently holding a floating home loan package with the following details:

• Outstanding $500,000 loan (25-year tenure)
• On year 4 of the loan with 22 years left to pay
• The cheapest mortgage rate available at 1.52 per cent.

Using an online mortgage calculator, we will be paying a total of ~$88,564 in interest at current rates.

Assuming that home loan rates are rise by a conservative 1 per cent, we will be looking at a floating rate of about 2.52 per cent.

If we continue without refinancing, here is what things would look like:

From 2023 onwards, we will be paying a total of ~$151,853 in interest.

This shows us that rising home loan rates could cost us an additional ~$63,289 in interest.

With such a large sum of money on the table, now is definitely a time to reconsider your home loan package to mitigate the effect of rising rates.

Should I Refinance Now?

If you are on a floating rate package

Using our $500,000 home loan example, let’s compare the interest paid within a 5-year timeframe to determine if it is worth refinancing.

If we were to switch to the 5-year fixed home loan from DBS, here is how much we will be saving at the end of 5 years.

Amount paid without refinancing on a floating package (2.52 per cent): $148,148.40

Amount paid on a 5-year fixed home loan with DBS (2.05 per cent): $141,276.60

Savings: $148,148.40 – $141,276.60 – $3,000 (refinancing costs)= $3,901.80

If we were to compare with a $250,000 home loan ceteris paribus, here is how much you will be saving at the end of 5 years.

Amount paid without refinancing on a floating package (2.52 per cent): $74,074.20

Amount paid on a 5-year fixed home loan with DBS (2.05 per cent): $70,638

Savings: $74,074.20 – $70,638 – $3,000 (refinancing costs)= $436.20

As evident in our calculations above, if your outstanding home loan is not large enough, you will start to lose money due to refinancing costs.

Otherwise, switching to a fixed home loan now would generally save you a few hundred to a few thousand as you can lock in lower interest rates.

If You Are on a Fixed Rate Package

If you’re on a fixed home loan package, you would need to consider whether your fixed rates are high enough to offset refinancing costs AND any penalty fees.

Conclusion

With three interest rate hikes by the Fed this year and more on the way, it is clear that home loan rates in Singapore are most likely going to go up further, in line with what analysts and banks are expecting.

So, those of us with a sizeable outstanding home loan should consider refinancing or even restructuring our home loans to mitigate the effects of a high-inflation environment.

As always, do your own due diligence before refinancing your home loan package and engage a mortgage advisor if required.