Refinancing home loans no longer attractive after 35-year cap: analysts

The current low interest rate environment has led to a trend of home buyers refinancing their loans to take advantage of promotional rates. Most analysts agree that it may no longer be attractive for investors with longer loan terms to do so, given the 35-year cap on new home loans.

Most home buyers refinance their mortgages in the third or fourth year of their loan repayment period. This as interest rates step up gradually over time, and as the usual ‘lock-in period’ for a loan package expires.

Usually lasting two to three years, the lock-in period refers to a period during which the borrower has to pay a penalty if he changes the terms of the contract, either by cancellation, prepayment or conversion.

But now that tenures for new loans are capped at 35 years, mortgage advisors said some home buyers looking at refinancing may be caught in a snag.

Under the new rules, those who want to refinance existing home loans will have to make sure that the tenure of the refinancing facility and the number of years that have elapsed since the first loan was disbursed, cannot add up to more than 35 years.

Timothy Kua, director of SmartLoans.sg, said: “If you bought a property say, three years ago, on a 35 or even 40-year loan tenure, and should you now decide to refinance to a different bank to enjoy better interest rates; in order not to violate any of the new rulings, you will have to shorten your loan tenure with the new bank to 30 years and this will result in a significant increase in your monthly payments, which you may not be able to afford.”

When the loan tenure is reduced from 35 years to 30 years, monthly payment could increase by 13 per cent, according to research by Maybank Kim Eng. This is for a S$1 million loan, with interest rate at 1.5 per cent per annum.

The restrictions come at a time when more than 45 per cent of new housing loans granted have tenures exceeding 30 years.

With net interest margins under pressure due to globally low interest rates, banks have promoted loans with longer tenures to boost loan growth. But stretching out loan tenures could give consumers a false impression of affordability.

Jonathan Koh, associate director at UOB Kay Hian Research, said: “These rules do prevent home buyers from over-extending themselves, buying homes that they cannot afford, and secondly, it does preserve the stability of the financial system within Singapore.”

When asked about the proportion of such long tenure loans that will be eligible for refinancing, the three local banks and most foreign banks here declined to comment.

In an emailed comment, HSBC Singapore said most of its customers who refinance their loans prefer loan tenures under 30 years.

Loan growth is expected to slow to 10 per cent this year, down from 28 per cent in 2011.

Shares of Singapore banks have fallen by as much as three per cent since the new rules were announced.

Source : Channel NewsAsia – 10 Oct 2012

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One Response to Refinancing home loans no longer attractive after 35-year cap: analysts

  1. Ansen says:

    So is this true? Lets look at the numbers and decide

    Scenario 1

    Assume you took up a 1 million loan 3 years ago on a 35 years tenure, a typical loan package with its repayment schedule will be as below.

    Year

    Interest rate

    Beginning Principal

    Monthly instalment

    Interest paid

    Principal paid

    Ending principal

    Year 1

    1.13% (0.75%+3M SIBOR)

    $1,000,000.00

    $2,883.85

    $11,178.91

    $23,427.25

    $ 976,572.75

    Year 2

    1.13%(0.75%+3M SIBOR)

    $976,572.75

    $2,883.85

    $10,912.81

    $23,693.36

    $ 952,879.39

    Year 3

    1.38%(1%+3M SIBOR)

    $952,879.39

    $2,996.97

    $13,004.88

    $22,958.75

    $ 929,920.64

    Year 4

    1.63%(1.25%+3M SIBOR)

    $929,920.64

    $3,109.50

    $14,991.43

    $22,322.62

    $ 907,598.02

    Said today you chose to refinance your loan after 3 years, because of the new MAS rules, your balance tenure will have to be 32 years or lower. The refinance repayment schedule for 32 years will be:

    Year

    Interest rate

    Beginning Principal

    Monthly instalment

    Interest paid

    Principal paid

    Ending principal

    Year 1

    1.08%(0.7%+3m SIBOR)

    $929,920.00

    $2,865.27

    $9,922.29

    $24,460.89

    $ 905,459.11

    Year 2

    1.08%(0.7%+3m SIBOR)

    $905,459.11

    $2,865.27

    $9,656.80

    $24,726.38

    $ 880,732.73

    Year 3

    1.13%(0.75%+3m SIBOR)

    $880,732.73

    $2,885.68

    $9,824.08

    $24,804.12

    $ 855,928.60

    Year 4

    1.53%(1.15%+3m SIBOR)

    $855,928.60

    $3,046.98

    $12,930.44

    $23,633.34

    $ 832,295.27

    Comparing the 2 tables, we see that there is still some savings if you refinance. Your monthly instalment will be reduced to $2,865 from $3,109. You will have a savings of $2,928 in the first year.

    Scenario 2

    Assume you took up a 1 million loan 3 years ago on a 40 years tenure (if its available), a typical loan package with its repayment schedule will be as below.

    Year

    Interest rate

    Beginning Principal

    Monthly instalment

    Interest paid

    Principal paid

    Ending principal

    Year 1

    1.13% (0.75%+3M SIBOR)

    $1,000,000.00

    $2,590.48

    $11,197.20

    $19,888.56

    $ 980,111.44

    Year 2

    1.13%(0.75%+3M SIBOR)

    $980,111.44

    $2,590.48

    $10,971.30

    $20,114.47

    $ 959,996.98

    Year 3

    1.38%(1%+3M SIBOR)

    $959,996.98

    $2,706.46

    $13,125.86

    $19,351.69

    $ 940,645.29

    Year 4

    1.63%(1.25%+3M SIBOR)

    $940,645.29

    $2,822.65

    $15,193.39

    $18,678.42

    $ 921,966.86

    You decide to refinance after 3 years. Because of the new ruling, the total tenure will be capped at 35yrs. Given that 3 years have passed, you have to reduce your loan tenure to 32 years.

    Year

    Interest rate

    Beginning Principal

    Monthly instalment

    Interest paid

    Principal paid

    Ending principal

    Year 1

    1.08%(0.7%+3m SIBOR)

    $940,645.00

    $2,898.31

    $10,036.73

    $24,743.00

    $ 915,902.00

    Year 2

    1.08%(0.7%+3m SIBOR)

    $915,902.00

    $2,898.31

    $9,768.18

    $25,011.56

    $ 890,890.44

    Year 3

    1.13%(0.75%+3m SIBOR)

    $890,890.44

    $2,918.96

    $9,937.38

    $25,090.20

    $ 865,800.24

    Year 4

    1.53%(1.15%+3m SIBOR)

    $865,800.24

    $3,082.12

    $13,079.57

    $23,905.90

    $ 841,894.34

    From the tables, your monthly instalment will increase to $2,898 from $2,822. An annual increase of $912. Is it worth it? We think it is, because you will pay off the loan 5 years earlier and save $5,157 of interest in the first year alone.

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