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As a norm, mortgage holders would consider refinancing their mortgage every few years because you can sometimes get a lower mortgage interest rate or enjoy more favorable mortgage terms, like having a cash rebate or even cashing out by further advance on mortgage. But in the current rate-hike cycle, should we refinance our property?
Interest rate may rise after refinancing
To put it simply, in a rate-hike cycle, the interest rate is rising, and the interest rate of new mortgages are theoretically higher than those approved a few years ago. In the context of rising interest rates, mortgages based on the Hong Kong Interbank Offered Rate (HIBOR), which has always been popular, have risen to the so-called “interest rate cap”.
If a mortgage was applied for before mid-2019, the maximum interest rate of major banks at that time was P-2.85% (P being the Prime Rate), which is equivalent to 0.29% of the actual mortgage rate. If the mortgage was applied for at the end of last year, the maximum interest rate of major banks would be P-2.5%, which is equivalent to 0.325%.
That is, if you applied for property refinancing at the end of last year, the actual interest rate was 0.035% higher than three years ago. If you choose to refinance now, there is a high chance that you will need to bear a much higher mortgage rate than at the end of last year.
The cash rebate may offset additional mortgage expenses
But when considering a property refinancing, don’t forget to count in the cash rebate in addition to the interest rate of the mortgage. Generally, when the bank approves the refinance application, it will give a cash rebate equivalent to about 1% of the loan amount. For example, if you borrow HK$4 million, you will receive a cash rebate of about HK$40,000. After deducting the legal fee of about HK$10,000 for the refinancing, you still make HK$30,000.
Theoretically, when the “penalty period” ends, mortgage owners can refinance their property to enjoy new mortgage terms and receive new mortgage cash rebate. They just need to consider whether the cash rebate part can offset the additional contributions brought about by the risen rate from refinancing in the two-to-three year “penalty period”.
Good credit score helps get the best mortgage rate
Even in a rate-hike cycle, you can still negotiate for relatively favorable mortgage rates if you are financially healthy, such as having a good credit score. Credit score will gradually improve with changes in credit habits. That’s why we recommend you to start monitoring your credit score to get a better idea about it!
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Wait, what about my credit score? I want my see my TransUnion credit report