You will be able to calculate whether the interest saved by switching beats the costs.
Farah and Hakim had three options on the table from lesson 8.1, Reprice or refinance when the lock-in ends. Stay on the package's floating rate at 3.60%. Reprice with their bank to 2.90% for an S$800 fee. Or refinance to another bank at 2.60%, paying about S$3,500 in legal and valuation fees. The lowest rate was obviously the refinance. Whether it was the best deal was a different question, and it has a number for an answer.
That number is the break-even: the month when the interest you have saved by switching finally covers what switching cost.
List every cost of the switch, in dollars. For a repricing, that is usually just the conversion or admin fee. For a refinancing, it is the legal fees, the valuation fee and any clawback still running on your old package. If you are still in a lock-in, add the penalty too, although switching inside a lock-in rarely pays.
Subtract any subsidy the new bank offers, but write down its clawback period, because you'll need it in a moment.
For Farah and Hakim, the refinance costs S$3,500 and the repricing S$800, both invented figures. Their old package's legal subsidy, if it had one, would have been clawed back too. In this example it didn't, but if their clawback had run a year past the lock-in, they would have added another S$1,800.
The saving is the interest you no longer pay. A good first estimate is the rate difference times the loan balance, divided by twelve for a monthly figure. It slightly overstates the saving, because the balance falls each month, but it is close enough to see whether a switch is worth checking properly.
On Farah and Hakim's balance of about S$387,976 in this example, moving from 3.60% to 2.60% is a one-point difference. One percent of S$387,976 is about S$3,880 a year, or about S$323 a month. Moving from 2.90% to 2.60% saves 0.3 points, about S$97 a month.
Divide the cost by the monthly saving to get the rough break-even month. Then check it with a month-by-month schedule for both loans, adding up the interest difference until it covers the cost.
Refinancing against staying put: S$3,500 divided by S$323 is about 11 months. The exact schedule gives month 11 too. After that, every month on the new loan is money saved.
But staying put isn't the real alternative, because repricing is on offer. So compare the refinance with the repricing. The refinance costs S$2,700 more, S$3,500 against S$800, and saves about S$97 a month more. S$2,700 divided by S$97 is about 28 months, and the exact schedule, with the falling balance, gives month 29.
Repricing against staying put breaks even almost at once: S$800 against a saving of about S$226 a month, so in month four.
Here is the rule that settles it. A switch only pays if it breaks even within the period you'll actually keep it, and the most useful period to test is the new lock-in. When that lock-in ends, you'll be choosing again, with a new rate gap and new costs, so savings beyond it aren't reliable.
The refinance comes with a two-year lock-in, 24 months. Against staying put, it breaks even in month 11, well inside. Against repricing, it breaks even in month 29, five months after the lock-in ends. So the extra S$2,700 of costs would be paid back only if they kept the refinanced loan past its lock-in, at whatever rate it reverted to. With the S$1,800 clawback added, the break-even against repricing would stretch to about month 49, and the case would be weaker still.
Farah and Hakim repriced. They paid S$800, moved to 2.90%, and set a reminder for three months before the new lock-in ended, when they would run the same sum again.
The answer would flip with a bigger rate gap, lower switching costs or a larger balance. If the other bank had offered 2.30%, the refinance would save about S$194 a month more than repricing, and it would break even in about 14 months, inside the lock-in. If the new bank paid the legal fees with a subsidy, the extra cost would drop, and so would the break-even. The rule stays the same in every case: the saving has to cover the cost within the new lock-in.
The same arithmetic works for an HDB loan owner tempted by a bank rate, with one extra line: the value of HDB's steadier rate, which you give up for good. Lesson 5.1, HDB loan or bank loan, covered that trade.
For your next switch, you'll need your balance from your loan statement, your current or post-lock-in rate, the offered rate and the full list of costs. In the activity below, calculate the break-even month for one switch.
Calculate the break-even month for one switch using your balance, two rates and the costs.
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