Refinance Case Study
Updated: Dec 22, 2020
Many of you know that housing loan (HL) interest rate is low now. I believe many agents have also contacted their clients and discussed on this matter. Sibor 1M and 3M is at very low level of 0.74334% + 0.93909% as on 24th April 2020.
Should you refinance?
When you refinance, you reduce the interest rates by switching from existing housing loan (HL) to another bank which offers lower interest rate (even with better terms). So that, you can save some money on monthly repayment.
Being say that, some borrowers may take the advantage of the low interest rate and refinance into a shorter-term loan, they may end up paying higher monthly repayments with lower interest rate.
A few things to check before refinancing: 1. The owner(s) of the property 2. When the property was purchased 3. Current bank, bank interest and existing loan amount 4. How much CPF money was used on the property, plus the accrued interest 5. Address and current market value (CMV) of the property
Below is one simple calculation on refinancing.
Case Study 1 (HL only) Mr. Tan & Mrs. Tan have a housing loan (HL) of $700,000 with ABC Bank with interest of 2.5%. Mr. Tan is 50 years old with monthly income of $6K. Mrs. Tan is a housewife. Can they refinance?
Answer: First of all, we need to find out IWAA (Income-Weighted Average Age).
Since Mrs. Tan is a housewife. So, IWAA is also Mr.Tan’s age which is 50 years old. Maximum tenure = 75 – 50 (IWAA) = 25 yr.
We still need to do second check using other formula and assuming the HL was first disbursed in 2014. Thus, 35 – 6 -1 = 28 yr.
Comparing the two, the maximum loan tenure now is 25 years (whichever is lower).
Existing HL with ABC bank $700,000 @ 2.5% for 25 years => $3,140.32 monthly repayment
New HL with DEF bank $700,000 @ 1.6% for 25 years => $2,832.56 monthly repayment
Looks good at first, as new monthly repayment is lower!
However, they also need to pass the TDSR test, TDSR = $2,832.56/$6,000 = 47.21%. They passed!
Now you think Mr. & Mrs. Tan can save almost $308 ($3,140.32 - $2,832.56) every month? More than that!!!! Interest rate for 2.5% is $1,458.33 while 1.6% is $933.33. This equates to $525 savings in interest per month!
There are many other factors and costs to be considered when doing refinancing. You can contact your banker for more information or let me introduce some good local bankers to you.
You also contact me for the comparisons summary of the bank loans.