Before we introduce our refinancing and debt consolidation services, it is important readers should know what refinancing is and why bother.
Refinancing a mortgage means paying off an existing loan of existing mortgage bank and replacing it with a new one in a new bank. There are many reasons why homeowners refinance: the opportunity to obtain a lower interest rate and cash rebate; the chance to adjust the term of their mortgage; the desire to convert from a P-plan to Hibor based plan with mortgage link; the opportunity to tap a home’s equity in order to finance other investment; and the desire to consolidate debt.
Some of these motivations have benefits and pitfalls. And because refinancing require re-assessment of stress test, paying legal cost, and locking up the mortgage with new penalty period, it’s important for a homeowner to determine whether his or her reason for refinancing offers a true benefit.
Securing a Lower Interest Rate
One of the best reasons to refinance is to lower the interest rate on your existing loan. If you bought the house two years ago at an interest rate between H+1.5% – H+1.7%, refinancing your mortgage now at the lower H-plan (e.g., H+1.24%) will certainly produce interest savings in long run. In the short run,due to the recent spike of Hibor, mortgage borrowers need to pay the cap rate 2.15%, interest savings of lower Hibor plan is not conspicuous. However, after banks inevitably raise the prime rate and H-plan rate falls below the cap rate, interest savings from lower H-plan will make a comeback.
Securing a high Cash Rebate
In order to attract borrowers to refinance, banks normally offer a one-off cash rebate for clients who transfer their mortgage to the new bank. Due to fierce competition among banks, such cash rebate recently skyrockets to as high as 1.95% of loan amount. Earning cash rebate is one of the most popular reasons for homeowners to refinance their mortgages. Think about this, if a homeowner refinance every two years (usually mortgage penalty period is 2 years) and get 1.95% cash rebate every time, that is a windfall profit which keeps recurring throughout the entire mortgage lifecycle. Of course, if interest rates subsequently rise, then homeowners may not be able to continue to refinance every two years because the cash rebate may not justify paying a higher mortgage rate.
Adjusting the Loan’s Term
When interest rates fall, homeowners often have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term. Conversely, homeowners can opt to refinance the loan at a longer term resulting in decrease in monthly payment. Refinancing the loan at longer term can result in higher total interests, but provide a short-term debt relief in case of tight liquidity, income shortfall or heavy cash burden arising from other debt.
Upgrading the Mortgage Plan
Many homeowners still hold a subpar mortgage plan from many years ago. For example, they may still use the P-plan and bears a higher long-term interest rate than the H-plan. Also, their mortgage plan does not come with the mortgage link account which is non-existent a few years ago. What is the mortgage link account? With a mortgage link account, banks will match your savings interest rate to your mortgage interest rate for part of your deposit giving you better returns on your savings deposit and greater flexibility in managing your finances and wealth. Without the mortgage link account, you can only earn around 0.3% interest rate for your deposit. Of course, you can earn more interest by subscribing banks’ fixed deposit plan. However, with a mortgage link account, your money are not tied up by fixed deposit lockup terms, and you can freely withdraw your deposits anytime you wish while still enjoying the higher deposit rates.
By refinancing your mortgage, you can get back the mortgage link account if your original mortgage plan does not have one.
Tapping Equity and Consolidating Debt
While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt. It’s important to keep this in mind when considering refinancing for the purpose of tapping into home equity or consolidating debt.
By refinancing and topping up the mortgage, homeowners often access the equity in their homes to cover major expenses and investments, such as the costs of home remodeling or a child’s college education or invest in a second home. With the mortgage rate at record low levels, it makes sense to tap into your home equity at a low rate and invest in other financial vehicles with higher yields. For example, tapping the home equity at 2.15% mortgage rate to purchase a carpark yielding 3% rental income enables you to enjoy positive cash carry as well as long-term capital appreciation of your “brick asset”.
Many homeowners refinance to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring with it an automatic dose of financial prudence. Take this step only if you are convinced you’ll be able to resist the temptation to spend once the refinancing gets you out from under debt. Be aware that a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage, and the return of high-interest debt once the credit cards are maxed out again – the possible result is an endless perpetuation of the debt cycle and eventual bankruptcy.
There is good news for homeowners looking out for debt consolidation. Traditionally, debt consolidation requires stress test to include existing debt monthly repayments, which made debt consolidation difficult to get approved unless the borrower has very high income level. Thanks to financial innovation, recently more and more banks are able to perform debt consolidation without requiring the existing debt payment be taken into the stress test equation. For details, please request a consultation with our mortgage advisors.
Why use Fairwealth refinancing services?
Please read this article: Mortgage Advisory Service for Homebuyers
The Bottom Line
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. When used carefully, it can also be a valuable tool in getting debt under control. Before you refinance, take a careful look at your financial situation and ask yourself: How long do I plan to continue living in the house? And how much money will I save by refinancing?
Again, keep in mind that refinancing requires re-assessment of stress test and incur legal fees (typically $6000-7000). The good news is the cash rebate easily recoup the legal fees and justify the efforts to prepare the salary proofs and other documents required for stress test. However, if you are not planning to stay in the home for more than a few years, the cost of refinancing may negate any of the potential savings. It also pays to remember that a savvy homeowner is always looking for ways to reduce debt, build equity, save money and eliminate that mortgage payment. Taking cash out of your equity when you refinance may or may not achieve any of those goals unless you have an investment plan which puts those cash-out equity to work at your advantages.