Rates are on the rise: Time to refinance your home?

Each month, people have to spend part of their hard-earned incomes on mortgage payments. Worse, during the early years of a mortgage, the payments go down the drain to pay off only the interest, not the principal.
The movement of interest rates over time plays a key role in debt repayment. It determines how fast you can pay off debts. If the interest rate on your mortgage rises in the future, you will face a longer repayment period.
One way to offload the interest burden is to refinance your mortgage to one that offers a promotional interest rate. This might sound straightforward, but in fact it could be a cumbersome task because of all the fine print. 
For example, some promotional campaigns require purchase of mortgage reduction term assurance (MRTA), which is in essence a kind of life insurance, or some might waive the mortgage registration fee. Therefore, every cost or saving from different refinancing campaigns should be taken into consideration. This includes MRTA, mortgage registration fees, fire insurance and appraisal fees. 
The hardest part of making comparisons is the variation of interest-rate schemes. Some banks might offer fixed interest rates, but most offer floating rates conditional on the minimum retail rate (MRR), which changes over the years. 
For example, you might get interest fixed at 0.75 per cent for the first year of the mortgage, and after that you get MRR minus 2.45 percentage points. If the bank’s MRR is 7.20 per cent, the second- and third-year rates are 4.75 per cent, so the average three-year rate is 3.42 per cent. This seems less than the bank offering a fixed rate of 3.75 per cent for the first three years.
However, that is an incomplete picture. Uncertainty on interest rates during the next three years is missing from that calculation. 
As the Thai economy starts to pick up pace, in turn heightening inflationary pressure, the Bank of Thailand will likely raise its policy interest rate in the coming years. This will soon translate into an increase in the commercial banks’ MRRs.
Therefore, taking into account the trend of rising interest rates, should we prefer a fixed mortgage rate over three years, rather than a floating rate?
No, not necessarily. Since promotional campaigns vary quite a bit across banks and across time, the proper way to do a comparison is to forecast the MRR for each bank. 
The main driver of the MRR is the central bank’s policy rate, which affects the commercial banks’ cost of funds. Between 2001 and 2010, MRRs usually followed the policy rate. However, since then, MRR adjustment has not relied on the policy rate quite as much. In particular, the two MRR reductions in April 2016 and recently in the second week of May had nothing to do with changes in the policy rate.
According to a study by TMB Analytics, the four largest banks’ MRRs are more sensitive to the policy rate than those of the smaller banks. In particular, if the BOT increases the policy rate by 25 basis points, the four big banks’ MRRs will increase by 11 basis points. However, those of small and medium-sized banks will increase by only 9 basis points.
Because of the gradual economic recovery, TMB Analytics also expects that the BOT will start tightening the policy rate twice next year, with more increases to follow annually from 2019 to 2023.
Based on that forecast, the MRRs of the four big banks will increase by 22 basis points in 2018, and 11 basis points every following year until 2023. Meanwhile, the MRRs of medium-sized and small banks will increase by 18 basis points next year, and by 9 basis points each year after that.
We surveyed 42 refinancing campaigns of large and medium-sized banks, and some small banks and specialised financial institutions, being offered for promotional periods from May to July this year. Based on the MRR projection, we found that the medium-sized and small banks’ campaigns provide the lowest five-year average interest rates – 4.7 per cent – while the large banks’ are around 4.96 per cent. 
On top of that, when we take all costs – interest rates, registration fees, MRTA, and appraisal fees – into account, the medium-sized and small banks’ annualised costs are 5.13 per cent of principal, still cheaper those of the large banks, at 5.55 per cent.
The next question is whether a fixed or floating rate is better. Based on the projection of policy-rate increases, the answer is a hybrid of both of them. 
Of the 42 schemes TMB Analytics studied, there are some campaigns that provide a low fixed interest rate for a number of years, followed by a floating rate. However, the rate deduction applying on MRR is relatively higher so that it has a sufficient buffer in case the MRR goes up. Therefore, the total expenses are relatively lower than the rest.
In short, even though the trend is for interest rates to go up, this does not always mean that a fixed rate will always be better. We should calculate case by case, depending on the promotional campaigns that banks offer. 
By understanding interest-rate sensitivity and observing the views of experts, we can basically calculate the best option for home-loan borrowers. If we do so, eventually it will help all of us reduce our debt burdens to some degree. 

PANAWAT INNURAK is assistant vice president of TMB Analytics. He can be reached at [email protected].
Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives.