If you’re currently servicing a housing loan, you probably know how that feels. (We mean reminiscing about your carefree days, not having sand blown in your face.) Now you think, “is there anything you can do to help reduce the strain on your finances?”
Does it pay to stay with your current bank?
If you haven’t noticed by now, taking a mortgage loan is like being next-in-line to the British throne – the more loyal and committed you are, the more likely you are to be taken for granted.
Have you been repaying your mortgage loan dutifully over the years? Do you politely shake your banker’s hand each time you visit?
Well, none of that really counts, because the next thing you know, everyone will be cooing and fawning over the next George or Charlotte to walk into the bank and take up a new housing loan.
“George, we’re delighted to offer you 0.89 per cent interest plus three-month SIBOR for the first three years!”
“Charlotte, pay only 1.72 to 1.93 per cent in variable interest for the first year!”
If you’d also like to enjoy some of these treats (i.e. lower mortgage payments every month), perhaps it’s time to refinance or reprice your existing loan package.
What is refinancing?
When you refinance, you replace your existing home loan package with a new one from a different bank. By switching to a more competitive loan package, you can save money by making lower monthly payments.
Let’s say you have a 1.90 per cent SIBOR package from your existing bank. If you refinanced your loan with a bank that offered a 1.30 per cent SIBOR package, you’ll pay less interest and save more in your monthly mortgage payments.
Having said that, you should be aware that refinancing comes at a cost – usually S$2,000 to S$3,000 in legal fees. In addition, if you refinance before your lock-in period is up, you’ll have to pay a penalty fee that usually amounts to 1.5 per cent of your outstanding loan. That means if you have $200,000 remaining on your loan, you may have to pay a $3,000 penalty.
What is repricing?
When you reprice your mortgage loan, you stay with the same bank but sign a different loan arrangement – usually on improved terms to save you money.
The benefit of choosing a reprice is that you can avoid the extra paperwork and legal fees when you refinance with a different bank. However, your bank knows this too, so whether you can convince it to offer you an improved loan package that is comparable to refinancing rates would very much depend on your negotiation skills.
There are many ways of repricing your housing loan to lower your repayment. For example, if you currently have a fixed-rate loan, you could consider switching it to a variable interest rate loan that generally offers lower interest.
Another option is to reprice with shorter loan tenure so you pay less interest over the full duration of the loan. Let’s say you took up a $500,000 home loan for 30 years, at an interest rate of 1.20 per cent. Your monthly mortgage would set you back by $2,344, and over time you would expect to pay $95,635 in total for just the interest alone.
Now assuming you had borrowed the same S$500,000 at the same interest rate of 1.20 per cent, but over a shorter loan term of 20 years. While your monthly repayment is unaffected, your total interest payment would only amount to S$62,646. By reducing your loan tenure by 10 years, you could actually save S$32,989!
When should you refinance or reprice your loan?
Now that you know the difference between refinancing and repricing your home loan, here are a few simple questions you should ask to determine if it’s the right time to act.
What is the remaining tenure on your existing home loan?
To avoid paying any early repayment penalty fees, make sure the lock-in period of your loan package is over. For housing loans, this is usually between one to three years.
How competitive are the interest rates of the new loan packages?
After you deduct all legal fees and penalty charges, how much can you save each month? Experts recommend only going ahead with a refinance or reprice if you can “breakeven” after a year.
For example, if your legal fees are $3,000 and you can save $150 every month by refinancing your mortgage loan. If you divided the cost of refinancing by your savings, you’d find it takes 20 months before you can actually enjoy any real savings. In this case, it might be better to find a more attractive refinancing package.
Conclusion
If you wish to reduce your mortgage payment, refinancing or repricing your home loan could be a great financial move for you.
Generally speaking, if you prefer a more convenient and hassle-free solution that helps you save, a reprice is probably more suitable for you.
On the other hand, if you want to get the most attractive housing loan package in current market conditions, you might wish to refinance your mortgage.
