Finding a mortgage rate that leaves you home free
Refinancing can offer ways for homeowners to more easily secure a debt-free future, but with so many options on the table, picking the right rate (and lender) can be a tricky task for the layperson, writes Oranan Paweewun
While homes represent the lion’s share of assets for many individuals and families, they can also entail the biggest financial burden.
With such high stakes, it’s worthwhile for those whose mortgage teaser rates are set to lapse (or already have) to consider a refinancing option to lower their monthly bills.
Local mortgage lenders typically offer a teaser rate — lower interest than normally offered — for the first three years to attract borrowers. Those who refinance ahead of the lapse of the teaser period are subject to a prepayment penalty (typically 3% of the initial outstanding amount).
Refinancing as a rule allows borrowers to lower monthly payments, build up equity in their homes at a faster pace, cut down interest costs and shorten the mortgage loan period by taking advantage of lower rates.
Based on a 30-year mortgage worth 2 million baht that is consistently paid down at the same rate, every one-percentage-point reduction in the interest rate will be able to shorten the payment period by six years, said Onanong Udomkantong, executive vice-president and head of retail loan products at CIMB Thai Bank (CIMBT).
In terms of amount, the one-percentage-point reduction will save borrowers 10,000 baht a year on a 1-million-baht loan and help cut tens of thousands a year in interest costs on a multi-millionbaht mortgage.
CURRENT OR NEW LENDER?
Borrowers must weigh the pros and cons of refinancing options on the table, Ms Onanong said.
A lack of closing costs — expenses associated with getting a home, such as origination, appraisal, mortgage and ownership transfer fees and fire insurance — is the major advantage of refinancing with existing lenders.
Major closing costs are mortgage fees at 1% of the borrowing amount; the ownership transfer fee of 2% of the appraisal value; and the stamp duty at 1 baht for every 2,000 of the borrowing amount but not exceeding 100,000.
The shorter processing period and a lack of paperwork are other advantages of refinancing with one’s current lender.
Even though refinancing with new lenders always comes with closing costs, the teaser rates typically offered are much cheaper than the mortgage refinancing rates given by existing lenders, which might help many borrowers come out on top, even if other costs are taken into account.
Moreover, several banks are waiving some of the closing fees in return for a longer lockup period.
It is important for borrowers to figure in how much the refinancing costs will be to determine which option is best for them, Ms Onanong said.
INTEREST RATES
Mortgage rates have two types, fixed and floating.
Fixed-rate loan allows borrowers to pay the same interest rate for a specified period as stated in their contracts, so payment remains the same, regardless of whether the market interest rate goes up or down, allowing them to predict the exact interest costs, she said.
With the fixed rate, borrowers cannot take advantage of the falling interest
If borrowers prefer certainty and predictability, the fixed rate is their choice. ONANONG UDOMKANTONG Head of retail loan products, CIMB Thai Bank
rate environment, but it can help save on interest costs when rates are rising.
The floating rate mortgages have an interest rate that changes based on benchmark rates — most lenders use the minimum retail rate (MRR) and others use the minimum lending rate (MLR).
“If borrowers prefer certainty and predictability, the fixed rate is their choice,” Ms Onanong said.
She recommends that mortgage borrowers, particularly those who want to make extra payments or have a large principal, pick a very low or even no-interest rate during the initial period to pay off the principal more quickly.
According to a Bangkok Post survey, there are many mortgage refinancing packages with average interest rates for the first three years at no more than 4% per annum, based on the current market rates.
GH Bank currently offers the best mortgage refinancing deal in the market right, with minimum retail rate (MRR) minus 3.85 percentage points — equivalent to 2.9% on average — for the first three years, and MRR minus 1 percentage point afterwards for those who work at companies that have contracts with the bank or MRR minus 0.5 percentage points for general borrowers.
The state-owned bank’s MRR now stands at 6.75%. In the event that borrowers are state officials, the bank has a package which charges MRR minus 3.75% percentage points or 3.75% for the first four years and MRR minus 1 percentage point for the rest of the loan term.
The bank also offers another package, but its average rate for the first three years is higher at 3.6%. Its interest cost stands at MRR minus 3.95 percentage points in the first year, MRR minus 3.25 percentage points in the second year and 2.25 percentage points below MRR in the third year.
Bank of Ayudhya (BAY) provide a mortgage refinancing package, for which the interest rate averages 3.42% a year during the first three years. Under the package, borrowers are charged a fixed 0.75% rate for the first year before it changes to a floating rate of MRR minus 2.45 percentage points for the second and the third year, and MRR minus 2.35 percentage points afterwards.
Another BAY package offers an average interest rate for the three years at 3.67%. While that rate is higher, borrowers are exempt from the 1% mortgage fee.
The package offers a fixed 0.5% rate for the first year, 1.95 percentage points below MRR for the second and the third year and then MRR minus 2.35 percentage points for the remaining loan term.
If borrowers want to lock in the rate for the three-year period, another package offering an average rate of 3.9% is an option. With this package, BAY charges 2.9% for the first year, 3.95% in the second year and 4.85% in the third year before floating to 2.35 percentage points below MRR afterwards.
United Overseas Bank Thai is among the lenders offering attractive teaser rates. The bank’s rate averages 3.48% for the first three years.
The bank offers a rate of 2.75% for the first two years, and 2.80 percentage points below MRR and 2 percentage points below MRR for rest of the loan term.
Even though CIMBT’s average rate at 3.59% for the first three years is a bit higher than UOB Thai’s, the former waives the mortgage fee with a cap of 100,000 baht, as well as the appraisal fee and stamp duty.
As for the package, it is interest free for three months, 4 percentage points below MRR from the fourth to the 12th month, MRR minus 4.16 percentage points in the second year, 3.55 percentage points in the third year, 2.25 percentage points below MRR afterwards.
OTHER MONEY-SAVING TIPS
Ms Onanong said customers should not reach the borrowing ceiling and pay more than the minimum requirement if possible, as a larger principal and longer loan payment carry higher interest costs.
Kasikornbank’s K-Expert said that a way to reduce interest charges and shorten the payment period is to increase the loan payment each month.
For example, paying 10% of the mortgage balance as an overpayment every month could reduce the total interest payment by 21% and shorten the mortgage term by 5.5 years. Paying 20% extra every month could cut the borrowers interest payment by 34% and reduce the loan term by nine years.