SINGAPORE – Interest rate rises have impacted mortgage payments, but local banks DBS Bank, UOB and OCBC Bank say home owners who recently refinanced their home loans have been able to cope with the hikes.
Mortgage brokers said some are even thinking of paying down their loans to reduce their monthly instalments.
Home loan rates shot up from the lows of around 1.15 per cent in the fourth quarter of 2021 to past 4 per cent in November 2022.
Loan rates are coming down though, and this is prompting other home owners to stick to their current packages as they look out for a more attractive package with lower rates.
Mr Joseph Wong, head of consumer credit risk management at OCBC, said the bank “does not see signs of mortgage stress among customers who refinanced their properties recently”.
DBS and UOB also said customers continue to be able to service their home loans.
Lawmakers had been concerned that home owners who refinanced their mortgage loans in the past year will face a sudden spike in interest rates.
Addressing their concerns in Parliament on May 8, Senior Minister Tharman Shanmugaratnam, who is also chairman of the Monetary Authority of Singapore (MAS), said 27,000 home owners refinanced their mortgages with financial institutions between March 2022 and February 2023.
He said these refinanced mortgages account for 6 per cent of the total number of outstanding mortgage loans.
MAS estimated that the average increase in mortgage payments for these borrowers was approximately $240, or about 2 per cent of their monthly income.
Meanwhile, their average monthly income had increased by about 10 per cent over the last three years, Mr Tharman added.
This would, therefore, help to cushion the hike in their mortgage payments, he further noted.
Instead of feeling financially strapped by the rising rates, home owners are paying down their loans when the lock-in period ends, said Mr Clive Chng, associate director of mortgage broker Redbrick Mortgage Advisory.
“They actually have the liquidity to pay off some part of the loan. A rising number of people are doing that,” he said.
By doing a partial repayment, home owners end up with a smaller outstanding loan amount, which can help to mitigate the rise in their monthly instalments from higher interest rates.
Ms Lee Meng, executive financial services consultant at Gen Financial Advisory, said the decision on whether to pay down a home loan depends on how close the home owner is to retirement.
If he is close to retirement (five years or less), Ms Lee said, then he can consider paying down or paying off his mortgage as he “may want to be debt-free” when he retires.
Ms Lee added that if a home owner is 10 years or more from retiring, he should not rush to pay down or pay off his mortgage.
“The home owner is using future income to pay down the mortgage, but interest rates will eventually revert to more normal levels, close to the inflation target of 2 per cent,” Ms Lee said.
Mr Chng said some home owners are considering using the savings in their Central Provident Fund (CPF) Ordinary Account (OA) to make the lump sum repayment.
The OA is yielding 2.5 per cent interest annually, which is lower than current home loan rates, he added.
Mr Chng said any decision to use CPF savings will have to be carefully considered, especially for Housing Board (HDB) flat owners.
He added that when an owner sells his flat, the sale proceeds will be used to pay off the outstanding housing loan.
He will also have to return the amount he used for his flat plus any interest accrued on that amount back into his CPF, Mr Chng said.
Accrued interest is the amount of money the owner would have earned if he had not taken out his CPF savings for his flat.
After paying the outstanding loan, if the remaining sale proceeds are insufficient to refund the amount of CPF used plus interest accrued, the owner must top up the shortfall with cash if the flat is sold below HDB valuation, Mr Chng added.
He does not have to top up the shortfall if the flat is sold above HDB valuation.
Taking an example, an HDB flat is valued at $500,000 and the owner sells it for $520,000, which is above valuation.
He has an outstanding loan of $250,000, and he has used $300,000 from his CPF.
After paying off the loan, the remaining sale proceeds of $270,000 goes back to his CPF account, but it is less than $300,000, which is the CPF amount he used for the flat.
Because he sold his flat above valuation, he does not need to top up the difference of $30,000 with cash.
If he sold the flat at $480,000 – below the $500,000 valuation – he has $230,000 left after he pays off his outstanding $250,000 loan, but he used $300,000 of his CPF. He will need to top up the difference of $70,000 in cash back to his CPF.
“When people use a lot of their CPF, the interest accrues quite fast after a while. This situation is more applicable for HDB flats, but if you use a lot of CPF for your private property, you can fall into the same situation,” said Mr Chng.
Mr Chng added there is another danger of using too much CPF savings. If the flat owner utilises all of his CPF savings now and he is subsequently laid off, he could end up with insufficient CPF savings for his future monthly instalments.
Instead of using CPF savings, some flat owners are using cash to pay down their home loans, but Mr Chng said any decision has to be carefully thought through.
This is because, if they subsequently need the cash, they cannot take out any of the money they used to pay down their HDB loans. Under MAS rules, an owner cannot take out a home equity loan on his HDB flat.
And if they used cash to pay down their bank loans, they can take back the money, but the banks will now charge them an interest on the cash that they are taking out.
Mr Chng added that some home owners will wait and stick to existing home loan packages after their lock-in period ends as they expect home loan rates to come down.
“The banks have dropped the three-year fixed interest rate packages quite a fair bit. Certain banks are offering three-year fixed interest rate of 3.5 per cent. Two-year fixed interest rates have been steadily dropping as well. At this point of time, the rates are between 3.55 per cent and 3.6 per cent,” he said.
For these home owners, they could consider packages that allow them to make a free conversion – with no administrative fees or penalties or both – to another package after a year, he advised.
“It is a two-year fixed interest rate but it comes with a free conversion after a year. The client is able to go back to the bank and ask for another package. If that offer is more attractive, he can move into this new package for free.
“But at least for the coming year, his interest rate is fixed and one year later, he is able to switch to another package,” added Mr Chng.
UOB head of group personal financial services Jacquelyn Tan said some customers are sticking with existing packages because they may have plans to sell their properties, or the interest rates on their loans are still lower than the rates on the new loan packages offered to them.
Ms Maryanne Phua, OCBC head of home loans, added that customers may intend to redeem their loans soon, so they stick to their existing packages. If they move to a new package now and subsequently pay off part of their mortgage loan early, they will incur prepayment penalty fees from the new package.
Whether a home owner decides to stick to his existing package, take on another loan package from the same bank or switch to another bank, there are some considerations to keep in mind.
Mr Brandon Lam, head of deposits and financing solutions at DBS Consumer Banking Group (Singapore), emphasised the importance of reading and understanding the terms of the home loan package.
“Some banks may impose a lock-in period, charge fees for prepayment, or the interest rate might be adjusted at the bank’s discretion”.
Mr Lam added that there are costs – such as legal and valuation fees – involved from taking on a new package.
“Some banks offer cash rebates to partially defray these costs. Borrowers need to weigh the interest savings against any additional costs,” Mr Lam said.
“Source:[Home owners who refinanced recently able to cope with increase in mortgage payments, say banks] © Singapore Press Holdings Limited. Permission required for reproduction”
