It is not uncommon to hear the term “free conversion” bandied around these days when comparing various mortgage packages out there when refinancing home loans in Singapore. Most of the major lenders learnt to bundle this in as part of their home loan offerings in a bid to attract new sign-ups.
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What Is A Free Conversion?
A free conversion simply means that the bank allows you to reprice to another prevailing home loan package without slapping the usual repricing admin fee which can range from $300 to $1,000. Banks being profit-driven will use every opportunity to make more fee income from existing clients. Compare this with refinancing to another lender who might be more hungry for your business and instead of charging you a fee, they would offer to pay the costs of moving your business over by way of a legal fee subsidy or cash rebate. For this reason, it will be unwise for anyone to simply reprice without first taking a look at what else is available in the market.
Incidentally the good news is made even sweeter now when you decide to refinance home loan through MortgageWise. This is because we throw in a $150 Fairprice gift card (subject to a minimum loan of $500,000), which effectively covers most of your valuation fees as well, which means your entire refinancing exercise can be done at absolutely zero cost! (terms apply).
As a standard practice, almost all banks would give one free conversion upon T.O.P. for BUC (building under construction) home loans when buyers purchase a new launch project. What this means is that buyers who bought new projects could ask to reprice or convert their loan from a BUC floating rate home loan to say a fixed rate home loan on completion of the property. Typically, banks would specify a period of time where this free conversion would be valid for, like within 3 or 6 months of T.O.P.
However, when it comes to refinancing of a completed or resale property, this free conversion option is not a given. Most banks would not offer this feature as it means they will not be able to earn a recurring fee income. Still, more and more so, banks are recognising the importance of offering a free conversion and is cleverly weaving it into their home loan product for differentiation. Some would give a free conversion during the lock-in period of the loan should the bank raise the mortgage base rate or the mortgage peg; others might throw in a free conversion at the end of a fixed rate term. All these are done with the objective of making the home loan package more attractive to a prospective homeowner who is considering a refinancing move.
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How Useful Is Free Conversion?
How does free conversion enhance the appeal of a home loan package for refinancing? One key factor here is it helps to remove the fear of being tied down to a bank which keeps adjusting rates upwards during the lock-in period. This is applicable to those on a floating or variable rate home loan. Nowadays all home loans come with a two-year lock-in period even for floating rate home loans. Banks who offer this feature is giving customers a sort of safety net that in event the bank has to raise the benchmark mortgage peg, the customer has a choice to opt out to another new package within the bank which would be of lower interest rate (typically packages for new sign-ups customers would be lower rate than existing customers). The free conversion also act as some kind of psychological restraint put on lenders who needs to think twice before deciding on an increase, knowing that any miscalculated move would result in massive conversions from one package to another of lower margins.
One caveat we need to give though – free conversion during a lock-in period is only as good as the repricing packages offered by the bank. We know some banks may not necessarily offer repricing clients the same rate as what they give to new clients, especially when they know these clients are still within their lock-in periods and would be unable to move out without incurring a penalty. Still, it makes no sense for the repricing bank to offer a package that is of a higher rate than the new revised interest rate that the repricing client has to pay.
For those on fixed rate home loans, free conversion is normally given at the end of the fixed term. Here, a free conversion feature is highly meaningful especially for those who opt for a two-year fixed rate home loan instead of a three-year fixed. This is because refinancing clients would need to stay for a minimum of three years to avoid a clawback on legal fee subsidy, which means they would need to reprice and stay for at least one more year when their two-year fixed term expires. The free conversion feature which is written into the letter of offer ensures that homeowners would not be at the mercy of lenders who could call the shots when slapping on admin fees as high as $1,000. They would have to reprice free of charge as contracted. And remember when the two-year fixed term ends, so is the lock-in. So lenders would need to offer an attractive repricing package as well lest the customer refinance out (yes, even paying back the legal subsidy of $2,000 may still make sense if the repricing offer is so inferior).
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Which Are The Loans Out With Free Conversion?
For floating rate home loans, both UOB and OCBC offers a free conversion during the lock-in period should the bank increase the underlying mortgage peg – the BOARD rate. For fixed rate mortgage packages, HSBC stands out with its superior two-year fixed rate home loan at 1.90% and three-year fixed rate home loans at 2% (both for minimum loan of $800,000) where the bank offers a free conversion at the end of the fixed term. Incidentally, these two packages are some of the last few sub-2% fixed rate for refinancing home loans in Singapore (see our article last week), which we forecast will come to an end very soon.
So for those with existing home loans where the lock-in expires within the next 6 months, now is the best time to take action. Speak to our consultants to find out how you can secure quickly one of these sub-2% fixed rate home loan for refinancing, along with our Zero-Cost refinancing option. It’s a no-brainer.
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. That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.