Interest rates are going up, time to refinance your housing loan?

The most recent cycle of rising interest rates was between 2015 to 2018 before it was abruptly interrupted by the Covid-19 pandemic. In a bid to keep their economies afloat then, central banks all over the world raced to dole out monetary easing policies. Since Singapore’s interest rates are partially influenced by the USD, many homeowners with home mortgages on floating interest rates found that their monthly mortgage payments had reduced as a result. After 2 years of ultra-low interest rates, we might have been lulled into a false sense of security that that dream house is now within reach because mortgages have become more affordable.

In March 2022, the Federal Reserve raised interest rates by 0.25% to signal the start of a new cycle of monetary tightening. With interest rates going up, I think it is timely to evaluate your current housing loan and how to go about refinancing it.

How Many Rate Hikes in 2022?

The Federal Reserve (‘Fed’) understands that the party of low interest rates eventually has to stop. Its hand was forced when inflation reared its ugly head to break multi-decade highs. Indeed, consumer price index reached a scorching hot 7.9% in February 2022! What is scarier is that there probably wasn’t enough time in February to capture the inflationary impacts arising from the Russia-Ukraine war.

To combat inflation, Wall Street is forecasting that the Fed would conduct an average of 5 to 7 interest rate hikes by in 2022 or a cumulative total increase of 150 basis points (bps). To homeowners, it is important to understand how this affects your mortgage especially if it is on a floating package.

To find out, I used the online mortgage calculator tool on MoneySense’s website. In a before and after interest rate hike cycle simulation, I kept all the assumptions constant except for interest rate which had increased by 1.5%.

As shown in Diagram 2, simply tweaking the interest rate from 1.2% to 2.7% led to a 19% increase in monthly payment on a $1mil loan with a 25-year tenure. In absolute terms, the increase is $728 per month. When viewed together with soaring inflation, this is not a small amount to be sniffed at even for an upper middle-class household. That is why I feel that 2022 is probably the time for homeowners to seriously start evaluating their mortgage package as an avalanche is not too far from the horizon.

Heartland Boy’s own refinancing experience

I am spared from this housing loan evaluation exercise as I was fortunate enough to refinance my housing loan back in 2020. Simply by switching from a HDB loan to a bank loan, I get to save over $14,000 in interest expenses!

Then, I also took a view that since interest rates were at rock bottom, it was a now or never chance to lock them in for as long as possible. Therefore, I chose DBS’s 5-year loan fixed at 1.5% p.a. amongst the various loan packages that were presented by my mortgage broker. This includes loans from the other local banks such as OCBC and UOB. The package I chose was undoubtedly higher than fixed-rate loans on shorter tenures and floating rate loans. However, I was also conscious that interest rates would rise once the global economy has recovered from the pandemic. This turned out to be exactly the case although inflation did have a hand on Fed hiking interest rates.

With 3 quarters left till the end of 2022, I believe that there is still sufficient time to evaluate whether your current home mortgage is the cheapest available in the market. To do that, you can start this journey by utilising a free online tool which I shall elaborate in the next paragraph.

PropertyGuru’s Smart Refi

PropertyGuru’s Smart Refi is a free tool so I spent some time forecasting various scenarios. To understand how much I can potentially save from a home loan refinancing exercise, I keyed in the parameters required such as the profile of my property and my current home loan package. Since I was simply running some scenario analysis, I tweaked some parameters and the results from my example were shown in Diagram 3.

For a free software application, I am quite impressed with the information provided and how they are displayed in infographics which makes it easy for the user to understand back at home. For instance, the near-term and long-term savings from refinancing are presented in bar graphs. Even immediate refinancing costs and fees have been considered so that you understand how long it takes for you to break even after refinancing your mortgage.

To find out more about the customer journey, I submitted an enquiry with my contact number. The very next day, a qualified loan advisor from PropertyGuru Finance reached out to assist me on my home financing needs as shown in Diagram 4.

Overall, I find that Smart Refi is a really simple and useful tool to use. This analysis helps homeowner take the first step in their home refinancing journey- i.e. to understand whether any mortgage package currently available in the market would help them save on their mortgage payments. There is even an “alert” button which can be switched on to help registered users actively track their current mortgage against what’s available in the market.

Most importantly, I think one of the best personal finance actions that you can probably take in 2022 is to review your mortgage today using the Smart Refi tool to secure a package before interest rates increase.

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