Refinance in 2024 or 2025?

With the Federal Reserve preparing to cut interest rates, many homeowners are asking: Is now the right time to refinance, or should I wait for even lower rates? Lower interest rates can make refinancing a smart move, helping you save money on monthly payments and overall loan costs. But timing is key. Here’s what you need to know to make the best decision.

What’s Happening with Interest Rates?

Federal Reserve Chairman Jerome Powell recently stated that “the time has come” to lower rates, with experts predicting a rate cut at the next Federal Open Market Committee (FOMC) meeting. While we don’t know the exact cut, it could be anywhere from 0.25% to 0.5%. These rate cuts in the U.S. often affect global markets, including Singapore.

Interest rates in Singapore have already been falling in anticipation of the Fed’s decision. For instance, two-year fixed-rate mortgage packages are now around 3%, and the floating rate based on the Singapore Overnight Rate Average (SORA) has also dipped. At the start of the year, SORA was 3.701%, but it has dropped to 3.572% as of August. Experts predict it could fall even further to 2.7% by the end of 2025.

Why Refinance Now?

Refinancing when rates drop could save you a lot. For example, let’s say you have a $1 million loan at 3.6% over 30 years. If the rate drops to 3.1%, your monthly payments would go from $4,546 to $4,270. That’s $276 less each month, which adds up to significant savings over time.

Additionally, if your loan is tied to SIBOR (which will be discontinued after December 31), you might face a jump in your payments since SORA tends to be higher. Refinancing now could help you avoid this increase and secure a better rate. Many banks are offering competitive deals and may even cover some fees like valuation and legal costs.

Should You Wait for Even Lower Rates?

While refinancing now can offer savings, waiting could get you even better rates. Analysts believe that U.S. interest rates will continue to drop through 2024 and 2025, which could further lower mortgage rates in Singapore.

For example, SORA is expected to drop to 3.4% by the end of this year and potentially down to 2.7% by the end of 2025. If you expect rates to keep falling, you might want to hold off and refinance when rates are at their lowest.

But be careful — rates in Singapore might not fall as quickly as in the U.S. The Monetary Authority of Singapore’s stance on inflation could limit how much domestic rates decline. If you wait too long, you might miss out on today’s favorable rates.

How Rate Cuts Can Impact Your Loan Amount

Falling interest rates don’t just lower your monthly payments — they can also increase how much you can borrow. Banks use stress tests to determine how much you can borrow, and when the stress test rate drops, the maximum loan amount increases.

For example, if a borrower with a monthly income of $16,000 over 30 years takes a stress test at 4.6%, they could borrow up to $1.7 million. But if the stress test rate drops to 4.1%, they could borrow $1.8 million, which is an extra $100,000. This increased borrowing power could help you afford a larger or more desirable property.

Fixed vs. Floating Rates: What’s the Better Option?

If you decide to refinance, you’ll need to choose between fixed or floating rates. Here’s how to decide:

• Fixed Rates: These offer stability. If you lock in a fixed rate now, you can secure predictable payments for the duration of your loan. This is great if you want certainty, especially since fixed rates are currently around 3%, which is lower than last year.
• Floating Rates: Floating rates are tied to benchmarks like SORA and can go up or down with the market. If you think rates will keep falling, a floating-rate loan could save you more money over time. However, if rates unexpectedly rise, you’ll end up paying more.

Some banks also offer hybrid packages, where you start with a fixed rate and later switch to a floating rate. This gives you the stability of a fixed rate in the first year, with the option to take advantage of lower floating rates later.

Refinance or Reprice?

If you’re considering refinancing, you might also think about repricing — switching to a new loan package with the same bank. While repricing might be easier, some banks charge fees for this. On the other hand, refinancing with a different bank may offer better rates but could involve legal and valuation fees.

UOB’s Jacquelyn Tan advises homeowners to calculate whether the potential savings from refinancing outweigh the costs of switching. For those with higher-rate loans, refinancing could offer enough savings to cover these costs and more.

What’s the Best Move for You?

The decision to refinance or wait depends on your financial goals and risk tolerance. Refinancing now could lock in lower rates and save you money, but waiting could offer even better rates in the future. However, there’s no guarantee how fast or slow rates will fall.

It’s a good idea to consult a mortgage advisor to review your current loan, fees, and savings potential. Whether you decide to refinance now or later, staying informed about rate trends will help you make the best choice for your financial future.