Every two years or so, I get to refinance my existing mortgage.
It is always an exciting time for me as I get to compare the different packages, fixed/floating, tenure, tricks the bank has come up with since the last exercise etc.
The banker I deal with always find me a little too enthusiastic. She has commented that I am too early to approach her, things may change, blah blah blah. I wonder who is the customer or the shareholder if I may politely point out.
Well. This time around, she palmed me off to her novice colleague. I guess I am no longer worth her effort. Others may be offended but I chose to take a positive spin on this – it means my account is no longer profitable for a senior bank officer to handle.
After some consideration and discussion with my better half, I decided to go with the floating 2 years package with maximum interest capped at 1.5%. Current rate is 1.1%. My existing mortgage is at 1.9% so fingers crossed that I will get to enjoy 1.1% for as long as possible. I initially wanted the fixed rate package at 1.3% but due to the impending rate hikes, this has gone up to 1.4%.
What the heck. Anyway, I am prepaying another $20k so outstanding loan is only about $160k. I borrowed $300k (over 13 years) in end 2017 so in 4 years, I have paid up almost 50% and shortened the loan tenure to 6 years. I wanted to shorten the tenure further but the bank insisted on charging me a non-waivable fee for that. WTF. After doing the sums, it’s a no brainer. So I will pay less per month while keeping to 6 years. This is another example of the predatory nature of the industry.
In two years time (2023), my outstanding loan will be around $100k with a tenure of 4 years left. My goal is to extinguish the loan there and then given I am no longer eligible to refinance. There is not only a minimum loan ($100k) but also a minimum tenure (5 years). Can you imagine? Ridiculous.
I will need to save whatever I will be paying less per month – say $350. So around $10k plus my usual $20k prepayment. I will still need to make up another $70k. Tough but not impossible. A lot will depend on the prevailing interest rate then.
Based on current projections, I would have paid $22k in interest cost in 2023. Already paid $19k so far. This is the banking model which people are not aware of or don’t talk about. However attractive the interest rate may be (I have never paid more than 2.4% in the past 4 years; lowest is 1.3%), the principal amount and the tenure are also key components of the formula. I dare say my original loan amount of $300k and target overall loan tenure of 6 years in total are very modest compared to my peers and industry standard. Even then, I will need to cough up almost $24k in interest alone, which makes up 8% of the loan amount. This means I am paying 8 cents for every dollar I borrowed.
And … this is the most important part. The bank would already have made its $$$ even with such low interest rates. In my case, even if I choose to pay down the whole loan in 2023, the bank would already have made 92% of interest due from my mortgage.
Amazing business model. I am glad I am a shareholder.