(F) lady deciding which bank to refinance to

Are Free Conversions Really Free?

First, what is a free conversion? Simply put, a free conversion means changing one’s home loan package (or repricing) within the existing bank without being slapped with the typical repricing admin fee which these days could range anywhere from $300 to $800.

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Free conversions are not new as a home loan feature, as banks vie for market share and write this into the loan contract to attract more sign-ups.  Most banks would offer this at the end of the mortgage lock-in period, or even anytime during the lock-in period for variable rate housing loans. What is new and interesting of late is – there are two banks now that offer this free conversion while one is still locked in on a fixed rate home loan!

This effectively turns such fixed rate home loan into a hybrid – a home loan that is both fixed and floating at the same time.  Hence, we shall refer to such home loans as “hybrid fixed rate” home loans.  What this means is that you can lock down a low fixed rate quickly while retaining the flexibility to convert to a lower rate later should interest rates come off, be it fixed or floating.  Banks usually allow this option to do a free conversion after serving out an initial period for example after 12 months into a lock-in period.  

The flexibility offered by such a free conversion while one is still locked in a fixed rate term is especially meaningful in the current context when rates are still exhibiting downtrends. Homeowners are worried that should they sign onto a fixed rate home loan too soon, interest rates may yet fall further as we head into 2020 with a threat of a global recession – a result of tariffs war.  After all, no one likes to sign and commit to a 2-year fixed rate at prevailing level of 1.89-1.95%, only to see this rate dropped another 20 basis points to say 1.60% in the next three months.  Better to sign on the dotted line later in that case.  Yet what motivates those doing a review on their mortgages now is the high interest rate they are currently paying or might be paying soon the moment their lock-in ends.  Plus it takes a further three months’ notice to refinance out to another bank; the longer they drag their feet on this, the more interest they end up paying which may offset or outweigh the benefit of waiting. Therein lies the dilemma which hybrid fixed rate seems to be the perfect answer.

With hybrid fixed rate, enjoy the best of both worlds – should rates drop, switch out to a lower rate and not be held to serve out the high fixed rate for the full two or three years fixed term; should rates rise unexpectedly in 2020, do nothing as one has already locked down today’s fixed rates

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After all the good news, now we give you the flip side.  Are free conversions really “free”?  Is there some kind of hidden costs or catch somewhere?

To answer that, we will take a look at how this free conversion is worded in the actual contract (extract from two lenders’ letter of offer):

“.. the request is to convert to the interest rate package determined by the Bank from time to time and any other applicable terms.. ”

“.. the Bank will at its discretion, determine which prevailing housing loan interest rate scheme you may request under this clause..”

It is clear.  Even if the marketing copy on the bank’s website says that one can exercise this free conversion to “any prevailing loan package” during the lock-in, the bank has the absolute right to determine which package it will offer for repricing, and it may or may not be the best rate that’s usually offered to acquire a new customer to the bank.  And if one is still within a lock-in period (slapped with a 1.50% penalty on the loan amount if one refinances out), there is certainly less bargaining power on the part of the homeowner.

Do not get us wrong.  That’s not to write off hybrid fixed rate home loans.  After all, we are recommending such loans strongly at the moment in view of the current uncertain rate environment.  It does address the dilemma faced by most undecided on which way rates would go.  However, as thought leader in the mortgage space, we need to point out to you the only drawback we see.  Still, we think if one calls to ask for repricing quote, even if his existing bank does not offer the absolute lowest prevailing rate that it offers to a new customer, it would still be a reasonably attractive rate just a tad more.  Certainly, it cannot be a rate higher than what one is already paying, which will be absurd.

If you have yet to work long-term with a trusted mortgage consultant, start comparing Singapore home loans through us today and save big on interests!

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.

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