Home loan rates are low — do you refinance or reprice? Five things to know
As banks cut interest rates, it is an opportune time for home owners to review their monthly cash outlay and ease any financial strain possibly caused by the COVID-19 pandemic. The programme Money Mind explores the options available.
SINGAPORE: In the midst of the financial crisis brought about by the COVID-19 pandemic, there is a silver lining for home owners.
Across the world, central banks like the United States’ Federal Reserve have slashed interest rates to boost economic growth, owing to uncertainty over the situation.
In Singapore, there has also been a decline in the Singapore Interbank Offered Rate (Sibor), which historically tracks US Fed rates.
This means banks here have reduced some of their home loan interest rates — good news for property owners with mortgages to pay.
For example, banking professional Richard Yeong, 39, bought his first home in 2016 and has since switched to a cheaper loan package twice, saving him thousands of dollars.
With global interest rates likely to stay low for longer, this is an ideal time for home owners to either reprice or refinance their mortgage. But which is better?
The programme Money Mind has a guide to what they should consider before they switch their home loan packages. (Watch the episode here.)
1. WHAT’S THE DIFFERENCE BETWEEN REFINANCING AND REPRICING?
When you refinance, you are taking out a loan with another institution to pay off your existing loan. Typically, people do this to take advantage of lower interest rates and make savings on their home loan.
Repricing, on the other hand, allows home owners to switch to a more competitive loan package within the same institution.
Both aim to lower the monthly repayment amount and the interest rate charged for the loan.
WATCH: Should I reprice or refinance my housing loan? Money hacks #3 (4:28)
2. REPRICING MAY BE A SAFER BET IF YOU HAVE CHANGED JOBS
If you choose to refinance, the new bank would assess your background, ask for your payslips and do a valuation of the property, said Stacked Homes co-founder Ryan Ong.
There’s a chance, if your financial situation has changed, that you may not be able to get the same kind of loan that you had before — if you’re earning less, for example.
With repricing, there is less paperwork, said Lena Teng, who leads the solutions and investment team at MoneyOwl, a financial adviser and fund management company.
“You don’t have to go through the whole hassle of a credit assessment ... legal fees and valuation fee as well as any lock-in (penalty) fee that you might be liable for,” she cited.
“Do consider repricing first, before going straight into refinancing.”
READ: What your mortgage bankers 'forgot' to tell you about home loans
3. CALCULATE YOUR REFINANCING COSTS FIRST
It is important that home owners compare the two options in terms of cost savings, taking into account the various fees such as the penalty for exiting a lock-in.
This lock-in period, usually two to three years, is the length of time during which a penalty is incurred if one pays off a loan in full.
Generally speaking, one should not break one’s lock-in period, as the penalty can be substantial.
For example, with a S$700,000 loan carrying an interest rate of 1.55 per cent for 25 years, the total interest payable by the end of the loan tenure is S$140,000.
If one reprices with the same institution at 1.35 per cent, the total interest payable drops to S$125,000.
If another institution is willing to offer an even lower interest rate of 1.25 per cent, the total interest payable drops further to $116,000.
A home owner refinancing within his lock-in period, however, would be subject to a repayment fee of 1.5 per cent of the outstanding loan. Including valuation and legal fees, the total refinancing cost would come to $13,000.
In this instance, the nett saving is S$11,000, while repricing offers a potential saving of S$15,000.
“Refinancing might cost you around S$2,500 to S$3,000 in conveyance fees, for example. That’s not including other costs,” said Ong. “Repricing might only cost around S$500 to S$800. There are also some people who have free repricing options.”
4. WHAT ABOUT FIXED RATES VERSUS FLOATING RATES?
There are generally two types of interest rate structures in the market: Fixed rates and floating rates. The former means the borrower locks in a certain interest rate for a fixed period.
A floating rate can be benchmarked against a reference rate that is pegged to transparent market indicators, like the three-month Sibor or the Swap Offer Rate.
It can also be pegged to the bank’s board rate or a fixed deposit rate, and this is “usually less transparent”, said Teng.
“(A floating rate) is subject to ... greater volatility in the sense that when it changes every one or three months, your monthly repayments would also fluctuate accordingly,” she added.
According to the Association of Banks in Singapore (ABS), fixed rate loans are “a good option if interest rates are low when you take out a housing loan, or if you want to budget with certainty over the initial few years of your housing loan”.
As for floating rate loans, if the reference rate goes up or down, one’s housing loan interest rate and monthly instalment would vary accordingly, subject to the terms of the loan agreement, the ABS said in a consumer guide on its website.
READ: Shopping around for a home loan? We explain the bank jargon in your mortgage agreement
5. THE SAVINGS CAN BE SUBSTANTIAL
When Yeong refinanced his housing loan in 2018, he managed to secure a floating rate of 1.65 per cent. But it spiked to 2.18 per cent last year.
Before the year end, he refinanced his loan again, at a fixed rate of 1.89 per cent for the first year, resulting in “quite a significant” S$400 to S$500 saving in monthly mortgage fees, he said.
“The extra savings definitely go a long way (towards defraying) the cost of living ... house maintenance as well as — given the COVID situation has (us) working from home — higher utility bills,” he added.
Maybank Singapore head of consumer finance Alan Yet noted that the Singapore dollar three-month Sibor dropped from 2 per cent in June last year to 0.54 per cent this June.
“The gap is huge. By refinancing (your home loan) today, you’re likely to save about 60 to 70 basis points, as compared to one year ago,” he said.
“Seventy basis points will translate into S$7,000 per year from a (S$1 million) loan outstanding ... That’s very substantial.”
Whether one chooses to reprice or refinance, however, the experts advise doing one’s sums before committing to a new mortgage.
Watch this episode here. Money Mind airs every Saturday at 10.30pm.
Readers can use this mortgage calculator to estimate the monthly repayments for their dream home.