It is not uncommon to hear the term “free conversion” bandied around when comparing various Singapore mortgage rate packages out there. 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.

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 or conversion 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 is 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.

As a standard practice, almost all banks would give one free conversion upon T.O.P. (collection of keys for Temporary Occupation Permit) 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 upon issuance of T.O.P. 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.

In fact, nowadays, some banks even throw in up to 2x free conversion for a BUC loan — once anytime during the construction phase of the property, and one more time at the usual T.O.P. stage. You must be careful to exercise the free conversion during the construction phase as we have clients who forgot about the 2-year lock that comes with any conversion. They ended up paying penalties as they thought they could refinance out at T.O.P.

When it comes to refinancing of a completed or resale property, this free conversion option is not a given as banks will try to earn a recurring fee income with every opportunity. The good news, however, is that due to intense competition in a high interest rate environment in 2024, most banks we know have totally put this conversion fee on hold whenever you call to reprice nowadays. You will get angry and rightly so if your existing bank proposes to charge you this fee.

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 12 months into a 2-year commitment period or 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.

How useful is free conversion?

How does free conversion enhance the appeal of a home loan package for refinancing?  In many ways it does especially when the free conversion is exercisable whilst one is still within the lock-in period. One key factor here is it helps to remove the fear of being tied down to a bank who keeps adjusting rates upwards during the lock-in period while interest is on its way up. Or the reverse could happen when you get stuck with a high fixed rate when interest is coming down like what we saw in 2023-2024.

Free conversion within the lock-in period started as a mortgage product feature more for a variable or floating home loan rate. Nowadays all home loans come with a two-year lock-in period even for floating home loan rates.  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 will then have a choice to opt out to another new package within the bank which would be of lower interest rate (typically packages for new-to-bank customers would be lower spreads or the mark-up).  The free conversion also act as some kind of psychological restraint put on lenders who would think twice before deciding on an increase to lending BOARD rates, 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 final rate that’s higher than what one’s already paying, or to incur the wrath of existing customers by offering a rate that’s too far away from prevailing market rates. This is because, notwithstanding the legal rights of banks written into the contract that any variation of rates offered is entirely up to the banks’ absolute discretion, they have to stay wary of potential complaints to MAS in an increasingly vocal market of consumer rightism.

For those on fixed home loan rates, 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 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 conversion fees which could ratchet up as high as $1,000.  They can seek to reprice free of charge as contracted.

What about free conversion within the lock-in period for fixed home loan rates?

Saving the best for last, the most useful free conversion are those given on fixed home loan rates whilst one is still within the lock-in period.

This is the number one factor behind most of our recommendations since the start of 2023 as we have seen longer duration fixed rates come crashing down more than 100 basis points (1%) from 4.25% to the current 2.85%, due to an inverted yield curve for a protracted period of time. That’s much lower than floating home loan rates pegged to the shorter duration loan pegs like SORA (Singapore Overnight Rate Average) which are all mostly holding above 4% today.

The free conversion feature on fixed rates provides an optionality to homeowners who can benefit from the much lower fixed rate immediately, yet ask to convert to a lower home loan rate 12 months later, be it floating home loan rates should SORA go all the way down to 1.50% (never say never), or even another fixed rate that continues to drop from 2.85% with each passing quarter that Fed cuts.

In that sense, the free conversion feature within the lock-in period has effectively made fixed home loan rates into a sure-win proposition which captures the best of both worlds: interest rate staying high or crashing down.

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