For many homeowners and property investors in Singapore, refinancing has become commonplace after one’s lock-in is over. It will be silly not to compare and to assume one’s existing bank will always offer the best rate. Over the years (since we started in 2014), we see more and more people opting to refinance through a professional mortgage broker. They have realized that it’s a much better way and they get better perks than applying direct to the bank for essentially the same interest rate.
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Not only that. By speaking with brokers, they get better advice and benefit from a broad overview of the market and how refinancing works. Instead of relying merely on the viewpoint of one banker. Things do change fairly quickly in the mortgage industry when it comes to rates, guidelines and even loan features. For example, just not too long ago, no banks offer full or partial waiver of lock-in penalty due to sale. Now at least four banks sell that.
To benefit more people, in this article we will share our experience – the top 5 things that most homeowners tend to overlook when they refinance home loan.
1. Legal fee clawback
Everyone understands what’s a lock-in on a mortgage loan. No one will overlook that. Lock-in refers to the amount of time where one is “bounded” to serve out the chosen interest rate package. The borrower is unable to refinance out, ask to vary or change the interest rate, or even prepay partially during the lock-in period. In Singapore, most banks will lock borrowers in for a period of two years, be it for fixed or variable rate home loans.
What most homeowners would miss however is the typical 3-year legal fee (or cash rebate) clawback period. Why is that important?
Understand that this additional one more year act like a pseudo “lock-in” where one is unable to leave the bank without incurring a loss. Though it is not as prohibitive as a 1.50% lock-in penalty, still no one likes the idea of paying back $2,000 refinancing out in the third year of the loan tenure. On a typical loan of $700,000, that’s like paying additional interest of 0.30% p.a.
What this means then is that homeowners would be left with little choice but to either stay put on the current higher rate in year 3, or reprice to another home loan package which may not be the lowest in the market. When one is still trapped in a lock-in or clawback period, there is not much bargaining chips to negotiate with the repricing bank.
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2. Interest rate in the third year (or after lock-in ends)
Somewhat related to the first point – the thereafter interest rate carries some significance especially the rate in the third year.
Many homeowners focus solely on getting the lowest rate in the first two years during the lock-in period. One good example is the current 2-year fixed rate home loan promotions where almost all banks are level now at 1.82-1.84%. But the thereafter rate in year 3 and the ensuing mortgage loan peg differs from one bank to another. Of course, no one can predict for sure what’s the actual rate in year 3 come 2022. Still the logical thing to do is to make a smart guess on which mortgage loan peg will move up the least over time.
With all things being the same, one should always go for the package with the lowest possible third year rate. That gives the highest chance of doing away with the need to reprice at the end of the 2-year lock. Hence, keeping the option to refinance out for truly what’s the best rate in the market later.
That’s also the reason why in our Rates Report and on our interactive Rates Display online, the default sort order is to show the top 10 home loan packages by the lowest average interest rate over a 3-year period.
3. Flexibility for partial prepayment
Partial prepayment is often overlooked as an essential loan feature. Many focused on that few basis points’ difference in headline interest rate between one bank or another, but forgot they could save more with early prepayment.
To exemplify this point, consider Candice with a typical loan of $700,000. Based on today’s lowest fixed rate at 1.82%, she saves 0.02% per annum compared with taking another fixed package at 1.84% that comes with the flexibility to prepay up to 10% per year during the lockin period. Over a period of two years, that 0.02% difference translates approximately into a savings of only $140 per year x 2 years = $280. Imagine if she were to prepay $20,000 per year using her year-end bonuses over the next two years instead, she would save approximately $40,000 x 1.84% = $736.
This could be an overly-simplistic example. But it does demonstrate the benefit of prepayment. Judging from our experience, many clients do express the intention to prepay throughout the year. And as homeowners mature in age, many see the benefits of keeping life stress-free and deleverage wherever possible. It’s much better than losing one’s hard-earned money to stocks and shares or investment opportunities peddled by one’s RM (relationship manager).
So, do not overlook the importance of having the flexibility to prepay. It could save you more than you think, especially if you factor in potential losses from investments.
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4. Free conversion
Conversion simply refers to repricing or changing interest rate package within the same bank. Very often banks will charge a small conversion fee for such requests which can range from $300 to $500.
Is free conversion important? In the grand scheme of things for refinancing, it is not. But remember what we said at the end of point 1 above – when one’s still in a legal fee clawback period and asks for a repricing, one loses bargaining power. Expect to be charged a fee, unless a “free conversion at the end of the lock-in period” is written into your loan contract.
More than a handful of banks are now dishing out this free conversion feature in a bid to win more customers. As such, one would be shortchanged to overlook this.
5. Notice period to refinance out
Almost half of those who come to us to review their mortgages come too late.
Those who are new to refinancing may not be aware – to redeem a loan in full requires a notice period of three months to one’s existing bank. And there are times where this could be even longer like five months due to a breakage fee clause in the existing contract where the loan must be redeemed on a specifc rate review date.
One will be caught out by this when they only start to shop around for the best home loan rates when they receive a notification letter from the bank indicating that their interest rate will be going up next month! This is because banks typically send this notice one month before the lock-in ends where the spreads tend to go up.
And this is actually one of the most understated reason why more homeowners should be working with mortgage brokers – so they can be reminded to do this review early. That way, they save a lot more on interest costs over time. This is because the moment their rate gets adjusted up the very next day after the lock-in expiration, their mortgages would already have been transferred out to “the lowest rate” player in the market. Just how cool is that!
Speak to our team of experienced mortgage consultants today.
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals. So, be it to refinance home loan, or to buy your next Singapore condo, speak to our dedicated team of mortgage consultants here for the best home loan rates.