For many Singaporeans, our properties are our biggest investments and home loans are the largest debt we hold. A home loan is a long-term financial commitment and likely one of our biggest monthly payments. So our ultimate goal is to reduce monthly repayment amounts or reduce the amount of interest to be paid.
As the world is still battling the Covid-19 pandemic, the uncertainty has seen a decline in the Singapore Interbank Offered Rate (SIBOR), which all home loan rates are pegged to. What this means is that banks here have reduced some of their home loan interest rates and that is good news for property owners with mortgages to pay. Typically, bank home loans come with a lock-in period of 2 to 3 years and during this period, it would not be advisable to refinance your mortgage with another bank, or make an early repayment for the loan. If you wish to do so, you are likely to incur a penalty fee of approximately 1.5% of the outstanding amount (which is likely to be a hefty sum), in addition to legal and administrative fees.
But what happens after the lock-in period? Many savvy investors would look to refinance or reprice their home loans. So should you Reprice or Refinance? Let’s examine the key differences.
Repricing refers to switching to a new home loan package with the same bank while Refinancing refers to closing your current home loan account and setting up a new home loan account with another bank.
If you choose to reprice, it is very simple and straightforward as you do not need to pay any legal fees and there is no need to do a valuation of your property. And because you are already an existing customer of the bank, they have all your relevant information and you do not have to submit any documents.
If you choose to refinance, it is more troublesome, aside from the legal and valuation fees you have to pay, you will face the hassle of appointing a lawyer and visiting his office for legal matters. Also the new bank will want to access your credit standing, past and current debts, credit card debts, car loans and other relevant information.
Repricing allows you to enjoy the new loan package within a month, while refinancing typically takes effect at least 3 months later. Thus, you could start enjoying interest savings earlier when you reprice. Moreover, in repricing, you would incur fixed conversion/admin fee. Most local banks charge about $800 as the conversion/admin fee.
For refinancing, if you add up the legal, valuation, and admin fees, it can amount to somewhere in the region of $2,000 to $4,000. However, because you are switching banks, most banks would offer some form of subsidy or cash back to help homeowners with this upfront cost.
Another factor to consider is your loan size. Banks usually do not provide refinancing for loans below S$100,000. As a rule of thumb, if your loan size is not more S$300,000, the legal, valuation and admin costs that you incur usually is higher than the interest savings. For small loan sizes, it is usually better to reprice.
Generally speaking, if you prefer a convenient and hassle-free solution, that helps you save a little bit of money monthly, repricing is probably more suitable for you. On the other hand, if you want to maximise savings and get the most attractive housing loan package in current market conditions, you may want to consider refinancing.
At the end of the day, cost savings is the main reason for homeowners to either refinance or to reprice their mortgage. But perhaps the most important thing to remember is that you should only refinance/reprice if the new interest rate that you enjoy provides cost savings in the next few years compared to the cost you incur for refinancing or repricing your mortgage.
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