8 questions to ask before you decide to reprice or refinance your home loan

First, what is repricing?  It simply means you renegotiate the contract and interest terms with your current bank and recontract with them, hence you “re-price”.

On the other hand, refinancing involves you taking your mortgage from one bank to another.  Doing so requires slightly more time and effort which is part of your costs.  You will then look at the overall cost-benefit ratio before you decide.  In the age of digital banking and advent of mortgage comparison sites, the time and effort required to refinance has been greatly reduced.

Beyond interest savings, what are some other considerations you should look at before you decide whether to reprice or refinance your home loan?  There are eight questions to ask yourself:

1. How early should I start my review?

Unknown to most, you can ink a new home loan contract with another lender as early as six months before your lock-in expires.  This can work for you in periods of interest rate escalation where you can lock down a lower fixed rate mortgage early.

In the latest U.S. Fed’s tightening cycle in 2022/23 when they went at top speed to jack up interest by 5 per cent in over a year, any delay even by a mere one to two months can prove costly.  For example, fixed rate home loans started 2022 at 1.08 per cent but ended the year at 3.90 per cent!

2. Should I use a mortgage broker?

Mortgage brokers have become more prevalent and provide more value-added service to homeowners over time.  Going beyond just rate comparison, which saves you much time and confusion trying to understand who has the best overall terms, a broker can arrange for reliable bankers and law firms leading to a seamless transaction.

What’s less obvious is that a trusted broker can also give you first-mover advantage. Most clients come to us late after receiving notification from banks on revision in BOARD, FHR, SIBOR, etc.  Besides the time to review and process a new loan, there’s also a need to give a two month’s redemption notice to the existing bank.  All that means you end up paying unnecessary high interests for an extra month or two, after your lock-in expires.

The best part is the service comes free to homeowners as banks pay brokers a small referral fee as part of the product distribution costs.

3. Will I be buying or selling a property soon?

Even before you delve into rates, think about whether you will be selling the property in the next two to three years.  You won’t want to pay the 1.50% redemption penalty (on the outstanding loan amount) when you sell within the lock-in period.  The usual events that trigger the need to sell revolves around family needs: to move closer to new school, new work place, or to be near aging parents, and so on.

Even if you are not selling, what about the need to buy a second or even a third investment property in which case there may be a need to decouple an existing property holding.  The best time to decouple will be during a mortgage review when the lock-in ends (decoupling involves a part-sale of property which attracts lock-in penalties).

Unknown to most, you can ink a new home loan contract with another lender as early as six months before your lock-in expires.  This can work for you in periods of interest rate escalation where you can lock down a lower fixed rate mortgage early.

4. Will I need to borrow more or pay down in the next five years?

People have changing needs at different stages in their life cycle.  There are times when you want a debt-free lifestyle nearing retirement, and there are times when you need capital to exploit opportunities during your most productive years.  Is there any need for an injection of funds in the next five years?

For private property owners, mortgage withdrawal equity loan (more commonly known as term loan in the industry) is the cheapest leverage you will ever find as it is secured against your property.  There’s also much lower risk of a “margin call” or high penalties to pay unlike business loans, revolving lines of credit, personal loans, etc.

The best time to gear up will be during refinancing when you get the lowest interest package for both the housing loan and the term loan.  At the same time, the lock-ins expiry for both portions of the loan will be close (usually within a month) which facilitates your mortgage review later. Another benefit is the cost angle. Taking up a fresh term loan during refinancing will just cost usually an extra $200 in legal fees which the new bank helps to defray with its legal subsidy or cash rebate. Contrast that with taking up a term loan with your existing bank which will cost at least $1,400-1,500, and there’s no subsidy for that.

5. What’s the current outlook for interest rate?

We come to the most common question now after tackling the less obvious – should you go for fixed rate or floating rate home loans?  

Forecasting the direction of interest rate is hard business and it is best left to the experts like mortgage brokers who track Fed action and its rhetoric closely. If you speak to bankers, most of the time because of their sales agenda and the need to meet targets, you will get views that support what they are pitching to you be it fixed or floating rates.

It is also important to understand where are we now in the interest rate cycle.  Whether Fed enacts another one or two more rate hikes, the truth is we are near the end of the tightening cycle which means there is now more downward bias on interest rates going into 2024.

It pays to do more research or speak to a mortgage professional who has a track record that you can trust.

6. How can I right-size my loan balance and tenure to save more?

Mortgage amortization essentially comprise four components of principal loan, tenure, monthly instalment and interest.  Most people look at only interest rate during a mortgage review.  They forgot there are two other ways to save, in fact save even more, by either paying down a portion of the principal loan, or reducing the loan tenure to the extent the monthly instalment remains affordable and is commensurate with higher income over time.

7. How do I see my job situation?

Do you see any headwinds in the industry you are in where there may be disruptions to your income?  Or the need to move to another position, job or even location for greater prospects, growth & development, or sometimes personal reasons.  In a fast-changing and uncertain world, it will be wise to plan ahead.

It may become harder to refinance a home loan when income situation changes, especially mortgages for an investment property which you may be ask to pay down 3% of the loan.  A floating rate mortgage with a reasonably-low and stable thereafter spread (the mark-up above SORA) might be a better option in such a situation.  This is because fixed rate mortgages always revert to a higher spread when the fixed term ends.

8. Lastly, what’s the costs involved and are there any advantages that I should be made aware of other than interest rate? 

Repricing attracts just a small admin fee (or conversion fee) as there’s no need to pay lawyers to redo the mortgage documents. In a competitive interest rate environment, banks might also waive this fee.

On the other hand, refinancing involves a change of the mortgagee bank with new contracts to be signed and caveats to be lodged.  A new valuation report is also needed.  However, it may still turn out to be a “lower-cost” option as the new lender typically offers a legal subsidy or cash rebate to defray all these costs almost entirely.

Cost must also be weighed against the benefits.  Banks offer different features on the mortgage product which can be of immense value depending on one’s need in the near term.  You may opt for home loan packages that offer a full waiver of penalty on sale of property during the lock-in period, or one that offers an interest-offset mortgage account.  Some may also allow you to do a hybrid loan where part of the loan is on a floating rate package with the rest pegged to a fixed rate to hedge against any upside risk.  Yet, there are those that offer you a high-yielding savings account when you move your home loan over.  The most well-known being Multiplier account with DBS home loan.

It is also important to understand where are we now in the interest rate cycle.  Whether Fed enacts another one or two more rate hikes, the truth is we are near the end of the tightening cycle which means there is now more downward bias on interest rates going into 2024.

Need more advice?  We don’t just throw you a set of rates, or get different bankers to sell to you.  Not only do we help clients navigate through Singapore mortgage rates quick and fuss-free, we show you how best to position and profit from the interest rate cycle, be it for residential or commercial property loan. Work with us today and you’ll also be helping to support our social cause!

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Disclaimer: MortgageWise.sg endeavours to bring the best insights and knowledge in our expert domain of mortgage planning to the market.  Still, all viewpoints expressed in our blog remain as opinions of the writer, and shall not be constituted as financial advice.  We cannot be held responsible in any way for any financial losses arising from your mortgage decisions should you choose to rely on any of our viewpoints and opinions.