The rising global interest rates have pulverised the refinance market as evidenced by the steady decline in mortgage refinance applications. Mortgage rates in Singapore have been rising sharply since the start of 2022 and still going up. But we are starting to see a reversal in the trend with fixed rate packages decreasing from Q2 2023 onwards.
The article will discuss whether you should refinance in 2023 or wait out for even lower rates. But let’s start with a quick introduction to refinancing a home loan.
Throughout 2022, the US Federal Reserve raised interest rates to tamp down inflation, pressing Singaporeans to fork out more money for their existing home loans.
Recently, in July 2023, the Fed increased interest rates again by 0.25 percentage points, bumping the federal funds to a target range of 5.25% to 5.50% but signalled for a halt in rate hikes at the next Fed meeting in Sept 2023.
Do note that the US Fed has not ruled out future rate hikes as inflation levels are still far beyond their target range therefore, there is still a fair amount of uncertainty of how rates will move going into 2024 as well.
With current mortgage rates in 2023 close to historic highs, many homeowners are thinking twice before refinancing their home loans. All this indicates that refinancing is off the table for many borrowers. Higher interest rates suggest you pay more to the bank or financial institution in interest on what you borrow.
This raises both your monthly repayment and how much you pay over the duration of the loan. Even a slight increase can make a significant difference when it is a home loan mortgage worth hundreds of thousands of dollars.
While it is usually not a great idea to refinance when interest rates are high (like they are now), there are some situations when a refinance might make sense for some people.
While 2023 may not be the best year to refinance, it could be the right move for select homeowners in Singapore. It will depend on their financial situation and the price difference with their current rate.
For instance, someone who purchased or refinanced their home loan during the record lows of 2020 and 2021 might not have much to gain from financing in 2023. But if they had purchased their home back in 2018 and haven’t refinanced since, then it is possible they could still find a more affordable rate by refinancing in 2023.
Some housing and mortgage industry experts believe interest rates might go down from the current highs, especially if a recession becomes more evident. As mortgage rates generally go down during a recession, if your interest rates fall below what you pay now, it is an opportunity to consider refinancing.
Here are two primary types of homeowners who could benefit from refinancing their mortgage in the current high rate environment:
Since most homeowners would have already locked in lower interest rates from the historical lows in previous years, they would prefer to stick to those rates for a while. But if you are currently servicing a higher interest rate of 4% or more and have a good credit score, it may make sense to refinance even if the difference in rates is less than one per cent. Every dollar counts.
It makes economic sense to refinance your home if you can lower your interest rate anywhere from 0.1% and onwards. For instance, a saving of 0.1% would result in a monthly interest saving of around $100 on a mortgage of $1 million, which translates into saving $1,200 per year.
If you can temporarily afford higher repayments and looking to wrap up your home loan sooner than anticipated, then refinancing may be for you. Refinancing to a shorter term may save you money and allow you to get free from paying the loan amount over the original lifespan of the loan.
If homeowners refinance their homes even if interest rates don’t fall in 2023, it might be out of necessity.
One of the most important and frequently asked questions when refinancing a home loan is whether to choose a fixed or floating rate. To get a logical answer to this question, homeowners must understand how interest rates will perform during the next two to four years. Here are two rules governing your choice of interest-rate loan:
In a stable or declining interest rate environment, it is suggested to refinance your home loan with a floating interest rate like a SORA rate. During such times, floating rates are generally lower than fixed rates as banks are willing to offer homeowners a lower rate in the short term and get business from them.
The banks will increase their mortgage rates after the market interest rates. If interest rates are stable or declining, fixed-rate mortgage loans tend to be slightly more expensive as the lender might charge a premium for offering you a loan that will no longer change, irrespective of the market conditions.
Always prefer a fixed rate over a floating rate in a rising interest rate environment (like it’s right now)! As a borrower, you will want to choose a fixed rate that will not increase even if market rates rise significantly.
So, even if fixed rates are relatively higher than floating rates when trying to refinance your loan, you will have the upper hand if the market rates rise after you refinance with a floating rate.
Even in a rising interest rate environment, some homebuyers may find opportunities to refinance and get a better home loan rate. Look at your existing mortgage agreement because the recent surge in interest rates may make more sense to stick with the current mortgage rates you signed up for one or two years ago.
You might also find that the thereafter-rates after the lock-in period may be even lower than the mortgage rate offered by financial institutions in the current scenario. If you are looking to buy a new home or refinance your existing home loan, now might not be a good time to lock in a fixed mortgage rate with a lock-in period of more than 2 years.
Refinancing an existing home loan while interest rates are still high means a higher likelihood of spending more money than you would save by staying with your current housing loan.
Refinancing allows you to lower your monthly mortgage payments and reduce the overall cost of borrowing in the long run. But your decision to refinance should not be only based on how interest rates are trending. When considering refinancing your mortgage, you should also consider some other key factors:
Always maintain a good credit score! Banks and financial institutions take your credit score into account when evaluating your home loan or refinance application. Lenders usually charge lower interest rates on your new mortgage if you have a high credit score.
If you don’t have a good credit score when refinancing your home loan, it is suggested to first plan and boost your credit rating over the next few months to make refinancing worthwhile in 2023.
It might not be smart to refinance your mortgage if you plan to sell the house or move into a new place in the next two years. This means, if you are planning to move in to a new home in 2024 or 2025, then refinancing in 2023 may not be worth it.
Regardless of what happens in 2023 and beyond, ideally, you should refinance every 2-3 years to lower interest costs over the long run. If saving money is your top priority and you are unlikely to move to a new place anytime soon, refinancing can be a smart choice. Refinancing a home loan will help you reduce your monthly instalments and the total cost of borrowing but be wary of the costs associated with it.
Our team of mortgage experts at Dollarback Mortgage can give unbiased, personalised advice based on your financial circumstances and help you decide whether refinancing is the right decision for you.
We help homeowners find the best refinancing home loan packages based on their needs and make confident property decisions to ensure long-term financial benefits.
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