If you missed out on the recent stock rally and are suffering from FOMO hangover, an indirect way to still participate in it is to refinance or reprice your home loan. In March 2020, the US Federal Reserve reduced the benchmark interest rate to between 0% -0.25% to resurrect the flailing US economy. As a result, the borrowing costs for Singapore banks have fallen dramatically as well. Savers would have already experienced this effect since the interest rates for the various flagship savings products had all fallen in tandem. Hoping to exact some measure of revenge, Heartland Boy began to actively monitor the various mortgage packages and deals offered by the financial institutions (‘FI’) during the Circuit Breaker. This month, he finally made the decision to switch out of his HDB loan. Here is the account of how I easily saved over $14,000 in interest expense by refinancing my home loan, with the entire application process taking less than an hour!
Why I Took Up A HDB Loan Initially
3M SIBOR was at decade high of ~2% and on an upward trend
HDB loan borrowers can always switch to a bank loan
Given that interest rates were on the ascendancy then as shown in Diagram 1, Heartland Boy preferred the certainty of paying a fixed 2.6% on his home mortgage. Because there is no lock-in period for a HDB loan, it means that he could still switch to a bank loan thereafter. Therefore, because he had first taken a HDB loan, he was perfectly positioned to take advantage of the current low-interest rate environment.
Fix The Parameters To Work With
To decide on the best home loan package to subscribe to, Heartland Boy discussed with Heartland Girl on the parameters to fix:
Waiver of penalty/commitment fee due to sale
Right from Day 1, the Heartland Couple’s intention is to sell their 3-bedroom BTO after it reaches its Minimum Occupation Period (‘MOP’). That strategy, undertaken in 2014 during their BTO application, has not waivered. It is also why they spent frugally on their home renovation process. Therefore, it is very important to them that any prepayment of the outstanding loan as a result of a sale of their apartment does not incur any penalty.
Maximise the loan tenure
As shown in Diagram 1, with interest rates at decades-low, Heartland Boy’s opinion is that it makes economic sense to use as little CPF Ordinary Account funds as possible to pay for their home mortgage. Any deposits in their OA that have not been used to pay the home loan will be earning 2.5% interest rate. Generally, a home loan is also considered a type of good debt (of course, if you can manage it). He would like to reiterate that this is just his perspective which suits his current household financial circumstances. There would be others who think otherwise and have their own preferred combination of low interest rates, CPF OA, cash balances and sanity.
Cash rebate to offset admin fees
When one refinances from one financial institution to another, expenses such as legal and valuation fees will be incurred. On average, this ranges between $1,800 to $2,500. He is looking to the mortgage refinance company to offer some form of incentives such as cash rebate to offset these charges.
Heartland Boy thinks that it is important to decide on the parameters as early as possible it allowed them to sieve through the numerous and ever-changing mortgage packages available in the market.
Bank Loan At 1.5% Fixed Interest Rate For 5 Years
After conducting his own due diligence and comparing the various mortgage packages, Heartland Boy finally settled on a 5-Year Fixed 1.5% package with DBS Bank. Actually, DBS offered various lock-in periods of 2,3 and 5-year at the same fixed rate of 1.5%. After the mortgage consultant took time to explain his queries, Heartland Boy eventually opted for the 5-year package. This is an extremely low rate to lock in for a prolonged period and let’s not forget that interest rates would go back up once the economy eventually recovers. Moreover, since Heartland Boy is planning to sell his house upon MOP, he does not want to deal with the additional factor of rising interest rates influencing his decision-making process.
It took him less than an hour to complete and submit the application forms and supporting documents. On the next day, he received good news that his refinancing application was approved! (thanks to the DBS home advice specialist who was super efficient)
Benefits Of Switching From HDB Loan To Bank Loan
Guaranteed Interest Savings of > $14,000 over the next 5 years
As Heartland Boy has explained earlier in his article, the eventual mortgage loan with DBS was based exactly on the parameters that he had discussed with his wife.
No doubt that the loan tenure and loan quantum have changed, rendering an apple-to-apple comparison impossible. However, bear in mind that the decision he faced was between A) Doing Nothing (stay with HDB) and B) Taking Action (switch to bank). To simplify matters even further, he only compares the interest savings between the period from Sep 2020 to Aug 2025. The start time coincides with the time he successfully ports over to the DBS Home Loan and the end time marks the end of the guaranteed 1.5% interest rate. He did not consider the savings in interest expense beyond this period because the interest rate cannot be ascertained now and it is likely that he would have sold his house already. Anyway, using a mortgage calculator online, he obtained the respective amortization schedules to confirm that the interest savings is approximately $14,500. Admin fees are assumed to be offset by DBS’s $2,000 cash rebate.
No commitment fee applicable for partial prepayment
In addition to the waiver of commitment fee/penalty arising from sale of the BTO, this is another flexibility that Heartland Boy really liked about the loan package that he took up. His broker explained that during the 5-year lock-in period, he can prepay the outstanding principal without incurring any commitment fee to the extent that there is still a “minimum” outstanding principal remaining with the bank. Heartland Boy further clarified that this “minimum” could even be as low as $1!
A further $50,000 in both Multiplier Accounts earn at least 2.4% interest rates
Heartland Boy and Heartland Girl both have DBS Multiplier Accounts. Heartland Boy had previously shared how crediting just one of their salaries has allowed both of their accounts to enjoy salary crediting. The good news is that home mortgage works the same way since both of them will be jointly servicing the monthly instalments.
Likewise, if we compare the action of doing nothing and taking action, the Heartland Household would gain additional interest income of $2,400 per annum. Taking up a home mortgage with DBS allows them to unlock a new category (besides credit card and insurance), and with it an additional $50,000 in their respective DBS Multiplier savings accounts easily enjoy at least 2.4% interest p.a. The additional deposits will be transferred from the Citi MaxiGain Savings Account to their DBS Multiplier Accounts. For simplicity, the $2,400 additional income presented in Diagram 3 does not include the opportunity cost of the interest income from the Citi MaxiGain Savings Account, which had recently yielded a miserly 0.72%.
Of course, no one could predict that interest rates would fall off the cliff as a result of the Coronavirus. But when such black swan events do occur, you should always think about how you could take advantage of it. Refinancing to a cheaper mortgage is one such action that home owners can definitely consider undertaking. The savings can be immense as Heartland Boy has shown. In addition, the improvement to your household’s cashflow is more than welcome during such difficult economic conditions.
If you are interested to refinance your home loan, pm me and I can link you up with the mortgage broker/consultant who assisted me considerably.