refinancing housing loan

[kurtgoh]

is it a wise choice to switch to banks loan at such mid-stage?

most banks are now offering around 1.5% with 2-3 years lock up.

My current loan only left 167k.. but until 2038..

should i switch?

or with the misc. costs etc, its better to stick with HDB since we are living in volatile time.

 

[iduncheckmail]

your quantum soooooo low. Just retire the loan.

 

[BBCWatcher]

is it a wise choice to switch to banks loan at such mid-stage?
most banks are now offering around 1.5% with 2-3 years lock up.

Actually DBS is currently offering as low as 1.40% with a 5 year fixed interest rate period. The minimum is S$100K, so evidently you qualify. If you value the 5 years of interest rate certainty, then that's a good one.

My current loan only left 167k.. but until 2038..
should i switch?
or with the misc. costs etc, its better to stick with HDB since we are living in volatile time.

Well, if you refinance S$167K for 17 more years at 1.40% your monthly payment would be about S$920. And 17 years isn't necessarily required; you may be able to elongate the mortgage term. I assume S$920/month is a fair bit lower than your current mortgage payment, so you would improve your monthly cash flow and, ideally, you would save and prudently invest 100% of the savings....

....Now here's the risk: the risk that mortgage interest rates rise after the fixed interest rate period so that by the time you reach the end of that period mortgage interest rates are 3.0% or even 4.0%, for example. (Or whatever they are.) However, if for example you've got S$338K wallowing in bank savings accounts then that's not much of a risk at all because you can just pay off the rest of the mortgage if you need to. And you will be reliably wealthier if you save and prudently invest all the money you save on your mortgage payment, so that helps, too.

Another possible scenario is that you're reliably expecting a bequest from an elder who is (and sorry to be morbid) definitely dying within the fixed interest rate period of this mortgage. Or yet another scenario is that you're going to sell this flat before the fixed interest rate period ends, for example you're going to sell your flat when the youngest child graduates from the nearby school. In these cases you're probably also well defended against the risk of rising interest rates.

 

[BBCWatcher]

your quantum soooooo low. Just retire the loan.

No, no, a thousand times no! Diligent savers and prudent investors should never, never retire what could be a 1.4% interest mortgage. You WILL be poorer if you do that, and you could even get into serious financial trouble, specifically a cash flow crunch, if you do that.

 

[dork32]

No, no, a thousand times no! Diligent savers and prudent investors should never, never retire what could be a 1.4% interest mortgage. You WILL be poorer if you do that, and you could even get into serious financial trouble, specifically a cash flow crunch, if you do that.

i agree that taking a low interest loan is good.

but there are fees related to changing of banks. eg lawyer fee is 2k. this is usually borned by the bank if the quantum is large. not sure if you can get any subsidy if it is a 100k loan.


then there is the valuation fee. this is usually not very large.

will have to do the maths carefully, on whether the savings on the low interest is able to cover the fees and cost.

 

[BBCWatcher]

i agree that taking a low interest loan is good.

but there are fees related to changing of banks.

There's no change of bank here, but there is a change of lender in this hypothetical. Kurtgoh is considering whether to switch from a HDB concessionary loan (2.6% interest) to a bank loan. (Or at least that's the only reasonable inference from what he wrote, unless he'd like to correct that information.)

eg lawyer fee is 2k.

I've seen $1,700 all-in, but let's go with your assumption.

this is usually borned by the bank if the quantum is large. not sure if you can get any subsidy if it is a 100k loan.

Let's assume no bank help with the fee.

then there is the valuation fee. this is usually not very large.

It's $120 all-in for a HDB flat.

will have to do the maths carefully, on whether the savings on the low interest is able to cover the fees and cost.

OK, let's do that. Let's assume $2,120 in costs ($2,000 for the lawyer and $120 for the valuation), $167,000 loan amount, and 1.40% fixed for 5 years.

I have to do some guesswork here on the current HDB concessionary loan. I'll assume $230,000 borrowed with a 25 year term. With ~17 years remaining, that gets pretty close to the $167,000 figure cited. The current monthly payment is about $1,040 with these assumptions. Refinancing would take the payment down to about $930 per month with these assumptions, for a savings of about $110 per month. You'll break even on the initial $2,120 expense after about 20 months, but this new mortgage features a 60 month fixed rate with an interest rate that's 1.2 percentage points lower. "Back of the envelope" sanity checking here, but that's good enough.

In short, you will certainly come out ahead with the DBS mortgage versus the HDB concessionary loan over the 5 year fixed interest rate period and at least a bit beyond. A prudent investor should also be able to beat the all-in cost of this money from DBS, even with OA interest (2.5%). There is no sense in accelerating repayment of this $167K in the current interest rate environment. However, the decision to take this bank loan still depends on your evaluation of the risk of higher interest rates. Please note that HDB concessionary loan interest rates aren't fixed either if Singapore dollar interest rates get high enough, but they are more resistant to interest rate increases. I estimate private mortgage interest rates have to get up around 4.0% before the HDB concessionary loan interest rate will start to rise off the 2.6% floor rate.

Finally, I should point out that it's VERY expensive to be forced to sell your HDB flat before you want to, much more expensive than $2,120 in fees. If you pay off a $167,000 mortgage then have $10 to your name, you're in a very, very financially precarious situation. Cash flow and liquidity matter, and HDB leaseholds are highly illiquid. You cannot borrow against them, and the only way you're liberating that equity is to sell the flat. A surprisingly large number of people don't understand this basic financial reality. They pay off their mortgages (while almost starving themselves and not saving) because somebody taught them "debt is bad," and then they get into big trouble the moment even a tiny emergency occurs. Please don't be one of those people, OK?

 

[dork32]

There's no change of bank here, but there is a change of lender in this hypothetical. Kurtgoh is considering whether to switch from a HDB concessionary loan (2.6% interest) to a bank loan. (Or at least that's the only reasonable inference from what he wrote, unless he'd like to correct that information.)


I've seen $1,700 all-in, but let's go with your assumption.


Let's assume no bank help with the fee.


It's $120 all-in for a HDB flat.


OK, let's do that. Let's assume $2,120 in costs ($2,000 for the lawyer and $120 for the valuation), $167,000 loan amount, and 1.40% fixed for 5 years.

I have to do some guesswork here on the current HDB concessionary loan. I'll assume $230,000 borrowed with a 25 year term. With ~17 years remaining, that gets pretty close to the $167,000 figure cited. The current monthly payment is about $1,040 with these assumptions. Refinancing would take the payment down to about $930 per month with these assumptions, for a savings of about $110 per month. You'll break even on the initial $2,120 expense after about 20 months, but this new mortgage features a 60 month fixed rate with an interest rate that's 1.2 percentage points lower. "Back of the envelope" sanity checking here, but that's good enough.

In short, you will certainly come out ahead with the DBS mortgage versus the HDB concessionary loan over the 5 year fixed interest rate period and at least a bit beyond. A prudent investor should also be able to beat the all-in cost of this money from DBS, even with OA interest (2.5%). There is no sense in accelerating repayment of this $167K in the current interest rate environment. However, the decision to take this bank loan still depends on your evaluation of the risk of higher interest rates. Please note that HDB concessionary loan interest rates aren't fixed either if Singapore dollar interest rates get high enough, but they are more resistant to interest rate increases. I estimate private mortgage interest rates have to get up around 4.0% before the HDB concessionary loan interest rate will start to rise off the 2.6% floor rate.

Finally, I should point out that it's VERY expensive to be forced to sell your HDB flat before you want to, much more expensive than $2,120 in fees. If you pay off a $167,000 mortgage then have $10 to your name, you're in a very, very financially precarious situation. Cash flow and liquidity matter, and HDB leaseholds are highly illiquid. You cannot borrow against them, and the only way you're liberating that equity is to sell the flat. A surprisingly large number of people don't understand this basic financial reality. They pay off their mortgages (while almost starving themselves and not saving) because somebody taught them "debt is bad," and then they get into big trouble the moment even a tiny emergency occurs. Please don't be one of those people, OK?

that should be the way to do it.

put up the pros and cons. and see which is better. notice that you did not mention 1 word about the cost when you were promoting switching over to bank loans.

with regards force selling, it will not occur to most people, whereas every one has to pay lawyer fees.

hdb has not raised interest rates since time began. but you mentioned that an increase of bank interest rates may affect the borrowers. you may also want to quote some numbers here, eg the bank home loan interest rate has been below 2.6% for how xxx years already. if i am not mistaken xxx = 17

but i do love the word concessionary loan interest rate. when dbs is charging 1.4% and hdb is charging 2.6%, it is the people that is giving concession to hdb

 

[BBCWatcher]

hdb has not raised interest rates since time began.

The OA interest rate hasn't been anything other than 2.50% since 1999. The HDB concessionary loan interest rate is pegged at 10 basis points above the OA rate. Those are the current rules, so there is the mathematical possibility the HDB concessionary loan rate could creep up.

but you mentioned that an increase of bank interest rates may affect the borrowers. you may also want to quote some numbers here, eg the bank home loan interest rate has been below 2.6% for how xxx years already. if i am not mistaken xxx = 17

Well, you have to be a little careful here. Market mortgage rates haven't been as high as 2.6% for quite a while, but that's not the rate you get when you run past your fixed interest rate period and cannot refinance (either due to job loss or because your remaining mortgage is below $100K, the typical minimum). Your incumbent lender will almost always shift you to a higher-than-market rate. That 1.40% DBS mortgage, for example, currently shifts to 1.80% after the 5 year fixed rate period -- at current interest rates.

As an aside, this too is one of the perils of accelerating repayment on a low interest rate mortgage. If you accelerate too much you may end up with a "stub" mortgage that's difficult or impossible to refinance, and then you could be stuck paying a higher-than-market interest rate to run out the rest of the mortgage. Not good! This could really bite you in the a**.

but i do love the word concessionary loan interest rate. when dbs is charging 1.4% and hdb is charging 2.6%, it is the people that is giving concession to hdb

However, even 2.6% is "not bad," and the LTV limit is higher (90% v. 75%).

 

[urban_desire]

same as ts currently on hdb loan, I'm undecided whether to pay off the loan to buy a 2nd property so that I can borrow more from the bank or should I save money to cover ABSD and 55% downpayment for 2nd property. The 2nd property is for investment.

 

[Jstrong]

same as ts currently on hdb loan, I'm undecided whether to pay off the loan to buy a 2nd property so that I can borrow more from the bank or should I save money to cover ABSD and 55% downpayment for 2nd property. The 2nd property is for investment.

Same...actually have only a few years left on HDB loan but now Covid thinking whether should buy 2nd property invest a bit. But not sure whether can rent also. Any thoughts...?

 

[urban_desire]

Same...actually have only a few years left on HDB loan but now Covid thinking whether should buy 2nd property invest a bit. But not sure whether can rent also. Any thoughts...?

as long as the location is not bad walkable to mrt and entry price is low, should be able to rent out and cover the monthly repayment with rental partially. I heard that 1 bedroom may be hard to get capital gain when sell as compared to more bedrooms.

 

[acetylcholine]

I have been asked to advise on whether it makes more sense to go for a fixed rate or floating rate mortgage if one is taking on a new property mortgage for around 900k. Given the low SIBOR / SOR environment, intuitively it sounds better to go with a floating rate mortgage. But when I delved deeper, it seems like most of the banks have adjusted their margin for SIBOR / SOR mortgages such that the difference is now only between 0.2 to 0.3 p.a. when you compare with a fixed rate mortgage. If I didn't remember wrongly, the margins for SIBOR mortgages were quite a bit lower when SIBOR was still high. So on the assumption that the SIBOR / SOR can't go much lower in the next 2 to 3 years, does it make more sense to go for a 3 year fixed rate mortgage for greater certainty? That said, I am thinking that the US fed won't tighten monetary policy anytime soon so IRs should remain low in the near term. Any thoughts?

 

[kurtgoh]

Hello BBC and party, thank you for your valuable inputs.

let me shine more details on the current situation.

Loan Expiry Date :31 Mar 2038
Repayment Period: 30 Yrs
Balance Repayment Period: 17 Yrs 2 Mths
Monthly Instalment:$ 1,017.00

interest as at Jan 2021, $416.51

My monthly contribution is around $800 while my spouse, the balance.
after deduction, we still got surplus as our income has grown over the years.

No intention in selling the flat as the location is good and very windy.

Second property, probably.
If i made lots of money in US market.
otherwise, we are contented with what we have currently, very blessed and blissful.

 

[BBCWatcher]

I have been asked to advise on whether it makes more sense to go for a fixed rate or floating rate mortgage if one is taking on a new property mortgage for around 900k. Given the low SIBOR / SOR environment, intuitively it sounds better to go with a floating rate mortgage. But when I delved deeper, it seems like most of the banks have adjusted their margin for SIBOR / SOR mortgages such that the difference is now only between 0.2 to 0.3 p.a. when you compare with a fixed rate mortgage. If I didn't remember wrongly, the margins for SIBOR mortgages were quite a bit lower when SIBOR was still high. So on the assumption that the SIBOR / SOR can't go much lower in the next 2 to 3 years, does it make more sense to go for a 3 year fixed rate mortgage for greater certainty? That said, I am thinking that the US fed won't tighten monetary policy anytime soon so IRs should remain low in the near term. Any thoughts?

In my view interest rates are quite low right now, so locking in a low rate seems like a prudent thing to do. You can get up to a 5 year fixed rate at 1.40% currently.

Hello BBC and party, thank you for your valuable inputs.

let me shine more details on the current situation.

Loan Expiry Date :31 Mar 2038
Repayment Period: 30 Yrs
Balance Repayment Period: 17 Yrs 2 Mths
Monthly Instalment:$ 1,017.00

interest as at Jan 2021, $416.51

My monthly contribution is around $800 while my spouse, the balance.
after deduction, we still got surplus as our income has grown over the years.

No intention in selling the flat as the location is good and very windy.

Second property, probably.
If i made lots of money in US market.
otherwise, we are contented with what we have currently, very blessed and blissful.

OK, so you could knock approximately $100/month off your monthly repayment, guaranteed for 5 years (DBS's current offer, as a notable example), and that's without elongating your mortgage term, which you could do. You could have as many as ~21 months until break even (to recover refinancing fees) then another ~39 months of guaranteed upside (the rest of the 5 year fixed interest rate period), followed by greater interest rate uncertainty from month 61. (Bank mortgage rates follow the market.)

If you're going to save and prudently invest the mortgage savings, and if you have some good financial strength to pay down the mortgage if interest rates spike in the future (i.e. you're in a good position to pivot to pay down debt that becomes high cost rather than low cost), then refinancing with a bank mortgage makes a great deal of sense. On the other hand, if you highly value the greater repayment stability that comes with your HDB concessionary loan, even if it currently means ~$100/month higher payments, then stick with it.

One way to think of that ~$100/month is that, if market interest rates remain about the same as they are now, that'd be ~$20,000 spread across the remaining mortgage term, less ~$2,000 in fees = ~$18,000 total savings. (I'm assuming you just keep repricing with DBS in this scenario.) Of course market interest rates may not remain about the same as they are now, but ~$3,900 of that ~$18,000 amount is assured.

 

[dork32]

OK, so you could knock approximately $100/month off your monthly repayment, guaranteed for 5 years (DBS's current offer, as a notable example), and that's without elongating your mortgage term, which you could do. You could have as many as ~21 months until break even (to recover refinancing fees) then another ~39 months of guaranteed upside (the rest of the 5 year fixed interest rate period), followed by greater interest rate uncertainty from month 61. (Bank mortgage rates follow the market.)

this is an example of very poor mathematics. comparing savings in terms of monthly installment makes no sense. paying less installment but having a larger outstanding loan amount is not the way to go.

what is the cost of this borrowing? it is the interest. it is much better if you can just compare the interest. outstanding of 167K at 1.1% is about 1.8k of interest savings per year. if you ocd and love calculating to the last cent , you may want to fv function to determine interest savings.

you want to use this 100/mth to compare, it is only fair if the loan is held to maturity at the stated rate.

 

[BBCWatcher]

this is an example of very poor mathematics. comparing savings in terms of monthly installment makes no sense. paying less installment but having a larger outstanding loan amount is not the way to go.

There is no larger loan amount.

 

[dork32]

There is no larger loan amount.

there is a difference in the loan amount

 

[streetfighter]

I heard so too.

as long as the location is not bad walkable to mrt and entry price is low, should be able to rent out and cover the monthly repayment with rental partially. I heard that 1 bedroom may be hard to get capital gain when sell as compared to more bedrooms.