The Workers’ Party Member of Parliament Dr Jamus Lim made his maiden speech in Parliament yesterday. It led to a lively debate between him and five Members of Parliament from the People’s Action Party. During the debate, the word “remortgage” was brought up, and this led to an interesting exchange between Dr Jamus Lim and Mr Sitoh Yih Pin. As the word “remortgage” can have several meanings, we’re taking the opportunity to share more about how it can be confusing.
But first, the context
Dr Jamus Lim was clarifying points made earlier in his maiden speech. In his response to Mr Zaqy Mohamad, Dr Jamus used the following analogy,
“… in a time when interest rates are at record lows, ask yourself, is it time for you, even as an individual, to perhaps remortgage your home? If you think that remortgaging with low interest rates are a good idea, that is about expanding leverage, that is about borrowing.”
This analogy led to a response ten minutes later by Mr Sitoh Yih Pin, who said,
“As an accountant, I’m rather perturbed by something Mr Jamus Lim said just now. If I heard you correctly, you said, given the low interest rate, it is now time to remortgage your properties. As an accountant with over three decades of experience, I can tell you that that is how people start getting into trouble. I hope you’re not teaching that in your classes.”
In his clarification to Mr Sitoh, Dr Jamus Lim made it clear that his “mortgage situation” was meant to illustrate his earlier point.
“If you borrow against low interest rates, and you invest in something that would give you higher returns, that is not just financially prudent, it is in fact going to be better for your balance sheet in the long run.”
Mr Sitoh responded,
“So if I may say, that is living in a stage of euphoria. You are always assuming that tomorrow will be better than today… You said, because of the low interest rate, I mortgage and then I reinvest to get the better return. You are assuming there is a better return, which may never come.”
Dr Jamus countered with an immediate clarification,
“No, I’m not assuming a better return, I’m saying if there are projects that give you better returns today, you should engage in those, substitute out from the lower returns, that are already locked in by your ability to borrow at low interest rates. It is not assuming a future euphoria, it is recognising that there are high-return projects today.”
You can find a video of the whole exchange here: https://www.channelnewsasia.com/news/parliament/videos/debate-on-president-s-address-mps-seek-clarifications-from-jamus-13078862
Dr Jamus' analogy comes at the 13:10 mark. The debate between Dr Jamus and Mr Sitoh starts at the 22:42 mark.
We’re not going to discuss the main crux of Dr Jamus’ speech and subsequent debate. That is out of our expertise. So, let’s just focus on the issue of remortgaging when interest rates are low.
What is remortgaging?
Remortgaging is a term used mostly in the UK. It has largely the same meaning as refinancing, which is what we call it here in Singapore. Remortgaging means to switch your existing mortgage to a new home loan package, usually because you want a lower interest rate.
However, that is technically not what Dr Jamus and Mr Sitoh are referring to. They are referring to what is known as “cash-out refinancing” or “home equity loan” or simply a “term loan” in Singapore. While those terms technically have different meanings, they’re all referring to the same thing – getting a loan by borrowing against your property’s value.
For example, assume if you have a private property in Singapore valued at $1 million. Your outstanding home loan is $300,000. If you refinance, you have the option of increasing your outstanding loan to $500,000, and then borrowing $200,000 in cash.
In Singapore, this is an option only for private properties. HDB homeowners are not allowed to borrow against their equity, even if their flat is fully paid up. EC owners must wait till after the Minimum Occupation Period.
Remortgaging with low interest rates
Dr Jamus is right that the best time to remortgage is when interest rates are low. This is because cash-out refinancing has the same interest rates as a regular home loan. That means, right now, interest rates can be as low as 1.18%! That’s ridiculously low.
Cash-out refinancing is not only the cheapest loan you can ever get, you are also able to borrow a significant amount. Depending on the value of your property, you could borrow anything from $100,000 to $1 million. Compare this to an unsecured personal loan, where effective interest rates are at least 4%, and you can typically only borrow up to four 4 times your monthly income.
Unfortunately, and we're going to keep repeating this, most homeowners in Singapore are not eligible because you cannot do cash-out refinancing for HDB flats. Maybe Mr Murali Pillai can bring this topic up in Parliament again?
However, Mr Sitoh is also right! You should not remortgage just because interest rates are low. Never borrow money unless you have an excellent reason for it. If you borrow money for the wrong reasons, then you’re still incurring costs, no matter how cheap the loan, and that is how people get into trouble. After all, 1.18% of a $1 million loan is $11,800 a year. That’s not a small amount.
That is why Dr Jamus’ clarification is so important. The remortgage should only be done when the returns are expected to be higher than the costs. What are some excellent reasons to remortgage?
1) Paying for the downpayment of another property 2) Investing in low-risk products like bonds 3) Capital to fund a new business 4) Paying off existing debt that incurs a higher interest rate
In fact, thanks to fixed-deposit linked home loan rates, even some fixed deposit interest rates are higher than 1.18%. Just look at DBS! For amounts below $20,000 you can get a 1.30% fixed deposit for just 18 months.
Need more information about cash-out refinancing?
It is the job of a professional mortgage broker to advise you about your options when it comes to home loans in Singapore. At Mortgage Master, based on our years of experience in the industry, we know best which home loan packages are suitable for your financial situation, and whether they can save you money in the long run.
Even if you own an HDB flat and are not eligible for cash-out refinancing, do contact us anyway to see how you can get a lower home loan interest rate.