You will be able to explain the difference between repricing with your bank and refinancing with another.
Two years and nine months after they moved in, a letter from Farah and Hakim's bank arrived. Their three-year fixed rate of 2.35% would end in three months. After that, under the terms of their package, the rate would become SORA plus 1.20%, which in this example worked out to 3.60%. The letter also offered, helpfully, to move them to a new package at 2.90%, if they replied within two weeks.
Hakim was ready to sign. Farah remembered lesson 5.2, Fixed, floating and SORA-pegged packages: the bank's offer was the first number, not the only one. This lesson is about what to do when your lock-in ends.
If you do nothing when the lock-in ends, the loan rolls onto the rate the package set for "thereafter", usually a floating rate with a higher spread. Banks expect many borrowers to stay there, and price those rates accordingly.
For Farah and Hakim, the balance at the end of the lock-in would be about S$387,976 in this example. At 3.60% over the remaining 22 years, the instalment would rise from S$1,883.50 to about S$2,130 a month. Staying put is the expensive default, so the real decision is between the two ways of leaving it.
Repricing means switching to a different package with your current bank. The loan stays where it is, so there is no new legal work and usually no valuation. The bank sends an offer, you accept, and the new rate starts.
The cost is usually small: some banks charge a conversion or administrative fee, some waive it, and the terms are in your letter of offer and the repricing offer itself. A repricing usually comes with a new lock-in, and sometimes a new clawback, so read the new terms as you read the old.
In the example, the bank's 2.90% offer came with an S$800 fee, an invented figure, and a new two-year lock-in.
Refinancing means taking a new loan from a different bank and using it to repay the old one. Because a new lender is involved, it needs a valuation of the property, a lawyer to discharge the old mortgage and register the new one, and a full credit assessment under the TDSR, and the MSR for an HDB flat, as in module 4.
That means costs: legal fees, a valuation fee and any clawback still running on your old package. The new bank may offer a subsidy for legal fees or valuation, which usually brings its own clawback. And because you are applying afresh, your income, debts and age all count again. If your income has fallen or your debts risen since you bought, you may not qualify for the same loan.
Refinancing also takes longer. Many loan agreements require written notice before you repay the loan, often a few months, and you pay interest in place of notice if you give less. Check your letter of offer for the notice period now, not when the lock-in ends.
In the example, another bank offered Farah and Hakim 2.60%, fixed for two years, with a two-year lock-in. Their lawyer quoted about S$3,000 and the valuation about S$500, both invented figures.
Repricing is cheaper to do. Refinancing often gets a lower rate, because banks compete harder for new customers than for existing ones. Which wins depends on the size of the rate gap, the costs, and how long you'll keep the new package. Lesson 8.2, Work out the break-even on switching, does the arithmetic.
Two habits make the comparison much easier. First, collect offers before you need them: from your bank, from two or three others, or through a mortgage broker, who is usually paid by the banks. Second, take your bank's offer back to it. Banks often improve a repricing offer when you show them a lower rate from a competitor.
Owners on an HDB loan have no lock-in, so this decision can come up at any time a bank rate looks attractive. The same comparison applies, with one difference: moving from an HDB loan to a bank loan is one-way. Lesson 5.1, HDB loan or bank loan, explained why. Once you refinance to a bank, the flat can't go back to an HDB loan, and you take on lock-ins and floating rates for the rest of the loan. A lower bank rate for two or three years has to be weighed against giving up HDB's steadier rate for twenty.
Farah and Hakim's bank wrote with three months to go. That is roughly the minimum time you need to collect offers, compare them and, if you refinance, give notice and complete the legal work. Starting earlier costs nothing. In the activity below, write your lock-in end date and the date you will start comparing offers, at least three months before.
Write your lock-in end date and the date you will start comparing offers, at least three months before.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).