Refinance SIBOR Mortgage To Fixed Rates – Mistakes To Avoid

By on January 10, 2015

Despite what every homeowner is reading in the news about refinancing being the smart thing to do in view of the rising SIBOR and SOR, actually depending on your situation, the smarter thing could be to do nothing. In any case, if you have already decided that refinancing to fixed interest is your choice of action, here are some important things to review. You might actually change your mind after going through them.

Are you on a loan with rising or constant rates?

There are typically 2 types of rate movement. You will either be on a loan which has a rising spread or one with a constant spread.

Rising Spread
Constant Spread
Year 1 SIBOR + 0.75% SIBOR + 1%
Year 2 SIBOR + 0.85% SIBOR + 1%
Year 3 SIBOR + 0.95% SIBOR + 1%
Year 4 SIBOR + 1.05% SIBOR + 1%
Year 5 SIBOR + 1.15% SIBOR + 1%
Thereafter SIBOR + 1.25% SIBOR + 1%

When you are on an aging mortgage with a rising spread, the prospect of refinancing can look all the more attractive at this moment. This is simply because if you are currently paying 3mSIBOR + 1.25%, you shouldn’t need any invitation to replace it with a new loan at 3mSIBOR + 1% or 1.30% fixed. Since we as individuals have no influence whatsoever on where SIBOR rates head towards, the least you can do is alleviate your financial burden by taking on a lower spread or a fixed rate that is lower than what you are paying now.

A dilemma that requires more thought arises when you are on a mortgage that has a constant spread throughout the tenor of the loan. Because switching to a fixed rate home loan can give you short term relief but put on long term misery.

Fixed Rate
Constant Spread
Year 1 Fixed 1% SIBOR + 1%
Year 2 Fixed 1.1% SIBOR + 1%
Year 3 Fixed 1.2% SIBOR + 1%
Year 4 SIBOR + 1.25% SIBOR + 1%
Year 5 SIBOR + 1.25% SIBOR + 1%
Thereafter SIBOR + 1.25% SIBOR + 1%

As you can see even though a fixed rate loan can make you feel savvy by beating the market, that feel good factor is only temporary. Because after 3 years from the example above, you are going to be paying more compared to what you will be paying had you stuck to your original loan. And this would go on indefinitely.

An expert may inform you that you can refinance the loan again after 3 years Of course you can. But will it make sense at all?

The reason why the strategy of refinancing to a new loan and refinance again after 3 years is flawed is due to the simple reason that interest rates are rising. This means that in 3 years, the available housing loans that you can refinance to could be even higher than what you are already paying at that point in time. And by the looks of things, you won’t be able to get away from SIBOR unless some maverick bank decides to conceptualize a loan with 20 year fixed rates.
when you buy a home
Refinancing to a fixed rate mortgage now could actually lock you into long term SIBOR loans with high spreads. So why not secure your long term plans now by committing to a package with a long term low spread.

Are you refinancing to a non-SIBOR loan?

There are many home loans that are pegged to different indexes. And most of them, if not all, are indexes directly or indirectly controlled by the lender. Just ask yourself this question. Do you feel comfortable when your lender has the full authoritative power to tell you how much to pay, and you have no choice but to pay accordingly?

Since the rise in SIBOR, a few other indexes have come under the spotlight. And one of them looks far more attractive than the rest as it is currently fixed to a certain percentage. It is an index that is pegged to an equation that takes into account fixed deposit interest rates.

Since such a loan has a currently fixed index and a fixed spread, you can say that in some way, it behaves just like a typical fixed rate mortgage. But surely you are kidding yourself?

A lender offering mortgages linked to their fixed deposit rates can change their fixed deposit rates at any time and there is nothing you can do about it. The argument against increasing fixed deposit rates is that by raising fixed deposit rates, a lender would have to repay more interest to it’s base of fixed deposit consumers. So why would they shoot themselves in the foot?

Why not?

If fixed deposit rates are raised, the costs are passed onto the mortgage consumers. On top of that, lenders will collect a spread. If we put it this way, by raising FD interest rates, a lender can actually garner a high level of goodwill toward FD end consumers while making home loan borrowers pay for it. And don’t forget that a bank will have much more loans on their books compared to deposits.

Imagine if the market has only 1 bank and 2 products. FD and mortgages. And FD interest are paid from mortgage repayments. Since the amount of loans in the market is more than the amount of deposits, why not we just use a very low factor of 2 and assume that amount of loans in the market is twice the amount of deposits. This means that by raising FD rates, not only does a bank generate more goodwill from their FD customers, they also make more money from the mortgages that have been underwritten. This is of course, an over-simplified example to drive home the point.

Are you moving too fast?

A competitive market always responds to the needs of the consumers. So by making a move now, it could mean that you will miss out on products that are specifically tailored to meet the needs of the consumers that are facing the current SIBOR situation. And let’s not forget that you will most probably lock yourself into higher thereafter spreads if you refinance. That alone is a great deal-breaker. This is still early days. There is not enough time yet for a responsive lender to create a loan that caters to resolve the current concerns.

The fear of most homeowners choosing to refinance now is probably that if they do not act now, they might miss the boat. But just maybe, making a drastic move on your loan now might not be the best play in the book. Because when almost everyone is saying that going with fixed rates is the way to go, it almost seems like that option is too obvious.



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