Currently, interest rates significantly impact consumers' lives both directly and indirectly. Each adjustment in interest rates reflects changes in consumers' financial liquidity, affecting spending and other financial planning as well. The latest information from the Monetary Policy Committee (MPC) of the Bank of Thailand has decided to maintain the policy interest rate at 2.50% per annum, marking the fifth consecutive hold since November 29, 2023, amid a sluggish economy and continuously declining consumer confidence. Many expect a reduction in interest rates to help consumers sustain their purchasing power during these challenging times.

According to data from the National Credit Bureau, the non-performing loan (NPL) status overdue by more than 90 days in the second quarter of 2024 stands at over 1.15 trillion baht, a 12.2% increase compared to the previous year. This includes over 218.67 billion baht in non-performing loans from residential loans, which is a 23.2% increase year-on-year. It is evident that the real estate sector is clearly affected by the sustained high-interest rates, contrary to the economic recovery, as housing is a high-value asset that most consumers need to finance through bank loans. With long repayment periods, interest rates become a crucial factor in the decision to apply for loans. According to the DDproperty Thailand Consumer Sentiment Study, interest rates are the most important factor for 78% of consumers when considering a home loan. Therefore, adjustments in policy interest rates serve as a compass that inevitably determines the financial direction for those planning to buy or currently repaying a home loan.

How do interest rate adjustments affect home buying?

The policy interest rate is set by the central bank, or the Bank of Thailand, which is the rate at which the central bank pays interest to commercial banks that deposit money or the rate at which it charges commercial banks that borrow money. This policy interest rate affects the interest rates that commercial banks charge their customers, whether they are borrowers or depositors. Thus, the policy interest rate is the most significant interest rate influencing other rates in the economy, including the real estate sector, directly impacting those planning to buy or currently repaying a home loan. If the policy interest rate is lowered or raised, the deposit and loan interest rates of commercial banks will adjust accordingly.

If consumers choose a fixed-rate loan for their home purchase, this means the interest rate will not fluctuate during the specified period set by the bank, which is typically a short initial period to attract customers. This is suitable for home purchases during good economic times when interest rates tend to rise, allowing borrowers to avoid increased interest payments as they remain under the original loan agreement.

On the other hand, a floating-rate loan is based on the long-term interest rate for prime borrowers, which is the minimum loan rate (MLR) that can fluctuate according to economic conditions, money market situations, and the bank's financial costs. This type of loan is suitable for borrowing during economic downturns, as interest rates are often lowered. However, if interest rates rise, borrowers will have to pay higher interest costs.

Understanding 'Retention' and 'Refinancing': Close Helpers for Home Loan Borrowers

Consumers who purchase homes during an economic slowdown should plan their finances carefully and continually learn techniques to reduce principal and interest payments. DDproperty, Thailand's number one real estate platform, invites you to learn about 'Retention' and 'Refinancing,' shortcuts that can help alleviate interest burdens when buying a home that many may not have known before. Both 'Retention' and 'Refinancing' aim to lower the interest rates on home loans, but they differ in their operational details as follows:

  • Retention is negotiating to change the interest rate with the current bank where the loan is being repaid. The bank will review the borrower's repayment history before considering the request. This method has the advantage of saving time on preparing new documents since it involves transactions with the existing bank, which already has the borrower's information. This results in a quicker approval process and lower fees compared to refinancing, thus saving time, reducing paperwork, and incurring lower operational costs.
  • Refinancing involves moving to a new bank to secure a lower interest rate. Many banks often offer special refinancing promotions to attract new customers, allowing borrowers to obtain lower interest rates than through retention. Additionally, some banks may offer extra promotions such as free property appraisal, free fire insurance, or free mortgage registration. The advantage of refinancing is that borrowers can choose the most valuable offers from various banks, making it a popular method as it clearly reduces the interest burden or may provide extra funds for home repairs if the loan amount exceeds the original limit.

Checklist Before Deciding: Which is Right for You, 'Retention' or 'Refinancing'?

According to the DDproperty Thailand Consumer Sentiment Study, nearly 3 in 5 (59%) homeowners are already familiar with refinancing, with higher proportions among middle and high-income groups (68% and 71%, respectively). Meanwhile, 34% are unaware of refinancing. The main reason for most consumers intending to refinance (60%) is the belief that it will help them save more money, while 52% believe it will lead to lower interest rates and payments, and 36% feel they have a better understanding of financial matters than before.

However, while the goal of retention or refinancing focuses on reducing interest rates, there are details and conditions that must be understood carefully. DDproperty has compiled a checklist to consider before deciding on retention or refinancing, enabling consumers to choose the most suitable approach to reduce interest rates:

  • Check the details of the original contract clearly: Typically, banks have promotional home loan rates that apply only during the first three years. After this period, the interest rate may shift to a floating rate, leading to higher payments. Therefore, borrowers should check the contract details from the start to understand the conditions for applying for retention or refinancing. Generally, banks specify that borrowers can refinance after a certain period of repayment. If refinancing occurs before the contract's expiration, borrowers may incur penalties based on each bank's policy. However, if borrowers need to refinance before the contract's due date due to an unbearable interest burden, they should calculate the penalty against the monthly interest payments to determine which option alleviates their financial burden more effectively.
  • Time for document preparation: One advantage of retention is that it involves transactions with the existing bank, which already has the borrower's documents and information, thus saving time on preparing various documents. The bank can use many of the original documents submitted for the loan application, making the process more convenient and quicker. In contrast, refinancing requires borrowers to prepare entirely new documents to meet the new bank's conditions, which takes as long as applying for a new loan.
  • Calculate all expenses: Many believe refinancing is more worthwhile since most banks offer special interest rate promotions. However, borrowers must not forget to calculate the fees for various processes. Refinancing with a new bank requires a new mortgage registration, resulting in higher costs than retention with the existing bank. The costs associated with refinancing include:
  1. Loan management fees according to the new contract: 0-3%
  2. Mortgage registration fees: 1% (currently, there are measures to reduce registration fees for residential properties, lowering mortgage registration fees from 1% to 0.01% for properties valued at no more than 7 million baht and mortgage amounts not exceeding 7 million baht per contract until December 31, 2024)
  3. Property appraisal fees: 0.25-2%
  4. Stamp duty: 0.05% of the loan amount
  5. Fire insurance costs

Additionally, after receiving approval from the new bank for refinancing, borrowers must inquire about the outstanding debt from the original bank, which they will need to pay on the redemption day. In contrast, retention typically incurs fees of about 1-2% of the original loan amount or the remaining balance, depending on the bank's terms. Consumers should carefully calculate and compare the costs. If the difference in interest rates is not significant, retention may be more worthwhile due to lower operational fees.

  • Negotiate for a favorable interest rate: Initially, borrowers should contact other banks to inquire about refinancing promotions to compare interest rates with retention at the existing bank to find the lowest average interest rate for the first three years. After this period, they can apply for retention or refinancing again to reduce interest rates. Generally, refinancing tends to offer lower interest rates than retention. If borrowers receive special refinancing promotions, they can negotiate with the existing bank to request retention at that rate. There is a chance that the existing bank may lower the interest rate as a special case to compete with rivals and retain existing customers, helping borrowers secure lower interest rates and better deals since retention fees are lower than refinancing.

Although retention and refinancing are essential tools that help everyone alleviate the burden of home loan repayments, reduce the amount of interest paid, and improve financial liquidity, the crucial aspect that everyone should not overlook when considering buying a home or condominium is to systematically plan their finances before applying for a home loan. This is to prevent liquidity issues, inability to make payments, and potential defaults that may follow. Such information will be reflected in the credit bureau's financial history and will impact the approval process when applying for retention and refinancing with any bank. Therefore, it is another important matter that should not be overlooked.

Furthermore, DDproperty has compiled updated refinancing interest rates for 2024 from various banks to assist consumers in comparing interest rates and basic conditions before proceeding to contact banks in the next steps. Additionally, it has gathered information on buying/selling/renting new and second-hand housing projects in various locations across the country to help everyone find the most suitable residence and prepare confidently before deciding to purchase their dream home or condominium.

About DDproperty

DDproperty is Thailand's number one real estate platform under the PropertyGuru Group, a leading real estate technology company in Southeast Asia. DDproperty has transformed the way people search for homes into an online platform, enabling Thai people to confidently buy, sell, rent, and invest in real estate.

Currently, DDproperty is a leading real estate platform trusted by home seekers and other property users, holding over 62% market share in Thailand. For more details, visit www.DDproperty.com; www.PropertyGuruGroup.com and our social media channels including Facebook, Instagram, YouTube, and LinkedIn.