One of my clients, Mr. AAA, has excellent credit profile and is financially strong – which was why I rated him as AAA. He requested for my assistance in refinancing out of his current home loan to a better rated home loan product. Very soon, it was made known that his property refinancing application was rejected and I had to bring the bad news to him.

What exactly happened?

Mr. AAA’s house, which sadly belonged to the former category, was bought last year with a 90% home loan, has suffered from a significant drop in the valuation. If he were to refinance right now, he will have to top up the difference! Of course, to some privileged few, this difference of money might not make any difference to them at all. However, to the majority of most Singaporean, this isn’t a very wise move to execute at all.

During a refinance, the banks don’t just look purely at your credit and finance. There are some other factors that they take into consideration and they might play a part in the rejection of your application.

Fixed rate mortgages are the most classic form of loan for home and product purchasing. A longer term mortgage such as the 25 or 30 year fixed rate mortgage has lower monthly payments than 10 and 15 year mortgages. However, it also has higher interest rates. Shorter term fixed rate mortgages benefit from lower interest rates than 30 year fixed mortgages. Apart from the above, another reason for the popularity of fixed rate mortgage is the inevitable build up of equity on the property in a shorter amount of time, since the principal amount is being paid off gradually as per each monthly repayment schedule.

Fixed rate mortgages are characterized by their interest rate including compounding frequency, amount of loan, and term of the mortgage. With these three values, the calculation of the monthly payment can then be done.

A flipside is that fixed rate mortgages are usually more expensive than adjustable rate mortgages. Due to the inherent interest rate risk, long-term fixed rate loans will tend to be at a higher interest rate than short-term loans. The difference in interest rates between short and long-term loans is known as the yield curve, which generally slopes upward, which makes long term loans more expensive. However, since the interest rates remain fixed regardless of higher interest rates that might arise in the market in future, fixed rate mortgage has a higher starting interest rate in the long term it turns out to be cheaper than the adjustable rate mortgages because the interest remains fixed.