7 February 2020 - Local housing prices have seen dramatic rises for many years now and show little indication of cooling off. This is, of course, bad news for potential buyers but fantastic for homeowners looking to cash in on some of their investments early. While banks have been slashing their cash rebates, mortgage refinancing is still a viable option if you follow the right plan.
Here's 7 ways refinancing can benefit you:
1. Cash-out for more capital
The housing market indeed has had its ups and downs over the short term, but generally if you were a home-buyer within the past few years, you will have seen a rise in your properties’ market value. Take Taikoo Shing for example, the typical middle-class housing estate neighborhood. According to Midland Holdings’ data, prices there have jumped from $14k / sq. ft. in July 2016 to $21k / sq. ft. in July 2019 (a whopping 50% increase in just three years!).
If you pursue mortgage refinancing, the gain on your property value can be exchanged for cash. Because mortgage rates are generally lower than personal loans, you as a homeowner, can obtain a large sum of capital for investment elsewhere at a much lower interest rate. This is actually one of the best reasons to re-mortgage property.
2. Watch your cash rebate itself
Some people may see no need to accumulate investment capital, but the extra cash is always going to be welcome. Some banks offer up to 1.6% cash rebate on mortgage refinancing. That comes out to $80k on a $5m loan amount. That could cover several monthly instalments, perhaps even a small-scale renovation, or a top-class European ski trip.
3. Seek better interest rates
When banks compete, this tends to result in competitive interest rates. Recently HIBOR and the prime rate have been holding steady at over 2%, while mortgage plans from certain banks were offering fixed rates as low as 1.68% a couple of years ago. This provides huge savings over time!
4. Go for Deposit-Linked accounts
A deposit-linked account is another rock-solid reason to refinance. These are savings accounts in which the interest rate matches the mortgage rate. Essentially any cash (50% of the loan amount maximum) put in this account will go toward reducing the amount of interest you pay on the loan. This is far better than normal savings accounts or time deposits!
5. Help the mortgage guarantor get off the hook
Many home-buyers designate family members or relatives as mortgage guarantors. While this arrangement helps a great deal in passing the stress test, it also puts the guarantor’s own credit status in a difficult position. If the true homeowner’s income improves beyond what the stress test requires, it might be a nice gesture to take the guarantor’s name off to free up their own credit capacity.
This simple trick is quite widely used by couples and families. The first purchase is made with one of the partners acting as the owner while the other serves as guarantor. A few years down the road when both go looking for a second property, they then switch roles. This way, they can acquire two residences without incurring the punishing double stamp duty (DSD).
6. Slash costs on mortgage insurance
Insurance is mandatory when you take out a mortgage loan amounting to over 60% of a property’s value. So, let’s say you had a homeowner with a $4m property who takes out a loan for $2.8m (70% of property value). Then, let’s say that owner refinances the mortgage after the property’s value rises to $5m two years later. The loan amount would then fall under the 60% threshold of the total property value, allowing the homeowner to forego any mortgage insurance.
7. Cut the monthly payments
Many homeowners seek to leverage their property to acquire a loan at a low interest rate; you see mortgage refinancing doesn’t necessarily have to create debt. Refinancing can give you a longer loan repayment period with the same loan amount, which somewhat alleviates the monthly payment burden on the owner. Please note, however, that prolonging your repayment plan may result in even more interest paid over the course of the refinancing period.
This article was written by Planto and originally published on the author’s website.
