If you are currently saddled with a home loan and are often scratching your head when terms like “repricing” or “refinancing” are being thrown casually across the dinner table by your more financially-savvy friends, fret not, because after reading this, you’ll soon realize — it’s not really rocket science.
Essentially, repricing your home loan refers to the switching of your existing loan package to a new one with the current bank (that is offering you your existing loan); while refinancing refers to the switching of your existing loan package to a new one with another bank.
To draw an analogy to telco services, repricing and refinancing is kind of like the difference between switching to a different mobile plan being offered by your current mobile service provider (repricing), versus switching to a mobile plan offered by another service provider altogether (refinancing).
While different, the goal of repricing and refinancing is to optimize the terms of your home loan — by lessening not only the total amount of interest you pay but also the corresponding monthly installments due.
Whether to reprice or refinance, ultimately depends on which option offers the most savings — and this may not necessarily be the option that offers the lowest interest rates. There are still other incidental costs and fees to consider.
Read on to find out more about the common costs and fees involved in repricing or refinancing your home loan.
Repricing usually involves a one-time fee of up to or around $800 (sometimes called a conversion or administrative fee).
For some home loans, like those for Building-Under-Construction (BUC) properties, repricing fees may be waived in some instances — for example, if repricing is requested because of an increase in the interest rate, or if requested within 6 months of the Temporary Occupation Permit being issued. Be sure to check your loan agreement terms for any such fee waivers, and seek the necessary clarifications with your bank.
Other than repricing fees, there are typically no other charges involved — aside from having to spend the time (well, time is money) contacting your bank to initiate the repricing.
The whole repricing process generally takes between four to six weeks to complete, so it is advisable to get the process started as soon as the window for any free repricing is open; or once you find that the savings from a repriced interest rate package more than offsets any repricing fees chargeable.
Even if you come across more competitive interest rates being offered by another bank, which look too tempting to refuse, you might want to hold your horses and first consider whether the refinancing costs and fees will upset your game plan.
If you are thinking of refinancing your home loan while still within your lock-in period with your current bank (which can typically range anywhere from two to five years), be prepared to face a prepayment penalty on the outstanding loan amount.
This prepayment penalty is also sometimes known as a “full redemption penalty” (because you are essentially borrowing from another bank to fully redeem your existing loan with your current bank), and is usually chargeable at 1.50% of the outstanding loan amount.
Because such a prepayment penalty can be quite significant, you should generally not consider doing refinancing during your lock-in period.
That said, given that banks usually require a written three months’ notice of your intent to refinance with another bank, and that the whole refinancing process with the new bank takes around the same time anyway, you also shouldn’t wait until the lock-in period is over before looking around and getting the refinancing process started. If you can, get the balling rolling three to six months ahead of your lock-in period ending.
For home loans relating to BUC properties, where monies are disbursed progressively according to each stage of the property construction, choosing to refinance your home loan at a point when the full loan amount has not yet been disbursed, will usually attract a cancellation fee.
Typically, cancellation fees range from 0.75% to 1.5% of the undisbursed portion of the loan. Some BUC property home loans may also impose a minimum cancellation fee, for instance, stipulating a fee of 0.75% of the undisbursed portion or $1,000, whichever is higher.
Do note that such cancellation fees may be incurred on top of any prepayment penalty, should you choose to refinance during your lock-in period.
If your current home loan was provided or previously refinanced with some deal sweeteners such as legal fee subsidies or valuation fee subsidies, refinancing it might trigger some clawback charges if you are still within the clawback period.
Just like how the prepayment penalty applies during the lock-in period, any subsidies you have enjoyed on your existing home loan will have to be paid back to your current bank should you refinance within the clawback period. Be sure to look out for such clawback terms in your loan agreement, particularly to see if you are still within any clawback period.
As refinancing ultimately involves a new bank having to go through the paperwork again to approve your loan and evaluate your property’s value, refinancing with the new bank will also incur legal fees and valuation fees.
Legal fees are paid to conveyancing lawyers who will draw up and lodge the necessary mortgage documents. The bank you are refinancing your home loan to will usually appoint one of the law firms on their panel. Legal fees can cost anywhere from $1,800 to $3,000.
The valuation fee, on the other hand, is paid to a professional for assessing the property’s market value — depending on the size/value of your property, this can range between $150 and $700 unless otherwise specified.
When considering which bank to refinance your home loan with, legal fee and valuation fee subsidies are often dangled by the different banks to defray your refinancing costs. Take advantage of these to reduce your out-of-pocket expenses.
Even if lower interest rates offered by other banks can seem enticing at first glance, it generally only pays to consider refinancing your home loan outside of any lock-in periods, clawback periods, and if doing so will not incur any cancellation fees on your part. Otherwise, you are probably better off just repricing your home loan.
If you think you’re ready for some refinancing, why not head over and compare some home loan options with GoBear?
This article was first published on GoBear Singapore blog.
