Sometimes working life in Singapore can feel like a long, dark road, like a tunnel. You walk and you walk and you walk and the darkness of the tunnel just seems to drag on and on. No matter how fast or how slow you’re moving, you don’t seem to be getting any closer to the end. Suddenly, after a long time, you see it. A flash of light! Retirement. A ray of hope at the end of the tunnel! You sprint towards it, watching it get larger and larger… until the oncoming train runs you over.
What’s that oncoming train? The CPF Minimum Sum? No, something much worse, and more unexpected… your home loan.
Home loans haven’t always been the way they are today. Today, there are limitations and eligibility constraints that make it very hard for someone to get a loan tenure that lasts into retirement. In the past however, this wasn’t the case.
If you’re coming close to 60 and you haven’t finished paying off your home loan yet, don’t wait till you’re about to retire before you do something about it. By then, it might be too late. Here are 4 reasons why you should refinance your home loan before you retire:
1. You will not be allowed to refinance with no income.
Let’s get down to basics here. The bank has lent you money to buy your house with the understanding that you’ll be able to pay them back. The easiest way they’re convinced you can pay them back is if you have a steady income. Without that, it’ll be harder for a bank to offer you a loan. Refinancing is basically asking a bank to take on your mortgage.
No matter how good your credit has been while you were employed, the fact that you no longer have a regular paycheck will prevent any bank from refinancing your home loan.
2. Your children won’t be able to help you.
Because of current regulations, you can’t even put your children’s monthly income as collateral. Well, technically you can, but only if the house is put under their name. And that creates its own set of problems, since your children now would be penalised if they tried to buy their own place. Why? Because on paper, it’ll look like they own two properties, so they’ll be charged additional stamp duties. Not only that, by technically taking on your debt, they’ll not be able to loan as much due to TDSR rules.
3. Home loan interest rates are rising.
The way home loan packages work, you’ll find yourself at the mercy of banks once you’ve left their lock-in period. Even fixed rate loan packages default to floating rate over time, so you might be trapped with a mortgage interest rate of 3% or more, without any alternatives because you can’t refinance anymore.
Even if you’ve been carefully planning your finances so that you can comfortably pay off your home loan into retirement, a rising home loan interest rate might cause your plans to be significantly derailed.
4. You may become unable to manage your loan repayment.
As with the previous point, no matter how prepared you are for retirement, you will never be able to be prepared for everything. Ideally, insurance products like home insurance or health insurance should be your safety net should anything happen. As you grow older, however, you may find your premiums rising to a point where you realise you’re literally paying for your agent’s weekend trip to Bali.
The worst case scenario in such a situation? Finding yourself needing to divide your limited funds between your insurance premiums and your home loan repayment. You should never be tempted to sell your home simply because you can no longer handle your home loan repayment. Even if you’re lucky enough to find yourself in a seller’s market, being unable to meet your monthly loan repayment should not be the reason to sell your retirement home.
But wait, this isn’t right! Retirees are the last people banks should be penalising.
We totally agree. Think about it – you’ve worked your whole life and have presumably learnt how to manage your finances well. You know your home loan repayments are going to last into your retirement – you’re not stupid. So you’ve definitely set enough money aside to pay off the remaining amount of your mortgage.
Then, without warning, the SIBOR starts rising. Banks take advantage of this and start increasing their spreads. The amount you’ve set aside suddenly isn’t enough, and you’re trapped. Not because you’re locked in to your home loan. But because the banks don’t allow you to save your retirement funds by refinancing or repricing.
Put simply: You’re not being penalised for having poor money management, you’re being penalised for choosing to retire. That’s like being penalised for being OLD.
This is something that MAS may want to consider looking into, given how the very essence of refinancing / repricing your mortgage is rooted in you wanting to save money and not be caught out with high interest rates that increase your monthly expenditure.
Technically MAS does provide relief from TDSR considerations if the properties being refinanced are Owner Occupied (meaning the owners are living in the property at present). Banks can choose to apply this relief at their own discretion, but sadly most, if not all of them choose to apply the ruling.
If you are getting close to that age where you are thinking of calling it a day with your career, refinance your home loan before you do anything drastic. Choose a home loan plan with a long term fixed spread interest rate to avoid any surprises once you retire. There are still packages on the market which fix their spreads (note: spread does not refer to the total interest rate) for the duration of the loan and this is a very good long term strategy.
Know any horror stories about retirees who couldn’t afford their home loan repayments? Share them with us.