Refinancing 101

Having in mind that i was approaching the end of 3 years with my current home loan package, i set off to check what was available in the market before the much higher 4th year rate kicks in. Now my loan package had no lock-in period at all, so i really should have done some investigation earlier to take advantage of lower home loan rates, if there was any. I looked, and lo and behold, home loan rates have indeed come down quite a bit. My original 3rd year rate was 2.85% which i thought was not a bad deal, but i found new home loan rates at 2.30% – 2.40% with 2 years lock-in. That means quite significant savings on interest payment.

So which is the best home loan package available? Market conditions are changing so quickly that the answer i put down here may be obsolete within a week. Eventually i decided to take up the SOR (Swap Offer Rate) linked loan package (some information available here).

At the time of this writing, the 3-month fixing SOR rate is 1.31%. The bank charges 0.65% on top of this rate, which means the overall rate is 1.96%. Yes, this is a very attractive rate (compared to 2.30%). In fact, the SOR had fallen to 1.17% at one point. I have started tracking the movement of the SOR (see my Daily SOR chart).

So what’s the catch to the SOR linked loan package? It is a floating rate package whereby the interest rate is changed every 3 months. You bear the risk of interest rates going higher (and it can potentially move by as much as 0.40% in a matter of a few days as can be seen in the SOR chart). Conversely, if interest rates move lower, you will stand to reap interest savings every 3 months. So can we have a sense of how the SOR rates will move?

For one, SOR is effectively SIBOR plus a bank’s lending costs, and SIBOR tends to track the United States Federal Reserve funds rate which is currently at 2.00%. Now i’m no expert in economic policies, but i do know the interest rate is a delicate instrument that can make or break the economy. Set the interest rate higher and it may curb spending and suppress inflation but suppress economic growth at the same time. Set the interest rate lower and it can stimulate the economy by encouraging spending but may also bring about the devaluation of currency and result in inflation.

Going by how the Federal Reserve funds rate adjustments have been, my gut feeling is that interest rates will be rather stagnant for a while (disclaimer: this is my personal opinion, please do not make any decision based on what i say). I’m going to try out the SOR linked home loan package for one year. Lets see what happens 🙂

(Visited 55 times, 1 visits today)






Leave a Reply

Your email address will not be published. Required fields are marked *