Refinancing vs Repricing: What to do with my home loan?

Is it really such a clear-cut decision to opt for refinancing or repricing when your existing home loan is soon exiting its lock-in period?

This is the dilemma many homeowners face, especially those who are refinancing or repricing for the first time. Which would be the more financially sound choice? Is refinancing really worth all of the administrative hassle? Would it be worth sticking with your current bank even if it means you need to pay a bit more but enjoy better overall perks?

Enter couple Andy and Ling, who bought their first property nearly 3 years ago. They are still undecided if they would be better off refinancing with another bank or repricing with their existing bank.

What key factors should they analyse in order to make a sound decision, and what options are available to them? Let’s find out:

Consider these 3 factors

1. Tenure of the loan

Generally, the home loan tenure is inversely proportional to the monthly instalments payable. To put it simply, you’ll need to pay off your total home loan in X number of years:

• A shorter tenure = higher monthly instalments, but less overall interest paid
• A longer tenure = lower monthly instalments, but more overall interest paid

2. Maximum age of the borrower

How much you can borrow (Loan-to-Value limit) also depends on your (the borrower’s) age. There will be a cap imposed on the amount you can borrow, if the loan tenure plus your age extends beyond 65. For joint borrowers, an average age is used. For Andy and Ling, this would look like:

Adapted from: MAS Rules for New Housing Loans

3. Total consumed period of the home loan

How much of the home loan have you already paid? For Andy and Ling, while they  started with a 25-year tenure, 3 years have passed by the time they thought of refinancing. These 3 years are the total consumed period of the home loan, which means they have about 22 years left.

Considering all these factors, Andy and Ling chose a longer tenure of 25 years so that they could have more liquidity (better cash flow) with lower monthly instalments. However, they know that it also drags the home loan out for a longer period, which means they may end up paying higher interest on an overall basis.

When they did their budgeting, they could have opted for a shorter loan tenure of 10 years (and possibly pay less overall interest). However, that was really cutting it close, as the pair wanted the flexibility of having better cash flow for future events such as having children, caring for their aged parents, or tiding through difficult times such as the ongoing Covid-19 pandemic and possible retrenchment. Should anything happen to affect their monthly income and expenditure, they could risk being cash-strapped in a time of need.

Andy and Ling’s needs can be met by DBS/POSB’s variety of attractive home loan packages that come with 2-, 3- or 5-year lock-in periods, and various tenures. Alternatively, they can consider the floating rate package with no lock-in.

Relook the costs involved

When refinancing or repricing your home loan, there will be fees involved.

For example, when you refinance you go to another bank and hence will need to pay legal/valuation fees of S$3,000 and above. When you reprice, you get a better rate with your current bank; but may need to pay a conversion/administrative fee that could be around S$800.

There may also be early redemption fees incurred, if you exit your home loan during the lock-in period. Here’s a summary of the typical costs involved, which is useful to help you decide on refinancing or repricing.

Typical costs involved in refinancing or repricing a HDB flat

Note: Fees stated are estimates based on HDB flats, and are not an extensive listing.

Those who choose to refinance with DBS/POSB can enjoy a cash rebate for loan amounts of at least S$250,000 (completed HDB flats) and S$500,000 (completed private properties). The minimum loan amount for all of DBS home loan packages is S$100,000.

This is attractive to Andy and Ling, as the outstanding loan balance for their HDB resale flat is well over S$250,000. They’ll be able to use the cash rebates to offset the legal and valuation fees should they choose the refinancing option. Then again, their current bank offers a free repricing option, so they’re still torn between the two.

Look for synergy with the bank’s products

In addition to getting a home loan with a good interest rate, look for synergy with the bank’s other products — where existing customers can earn higher bonus interest on their savings account, benefit from preferential interest rates on other bank products, and so on.

Synergy with the savings account

Andy and Ling each have their own DBS Multiplier Account, a savings account that offers a good bonus interest rates. Let’s say they are also crediting their salaries, and spending using their DBS/POSB credit card. That counts as 2 eligible transactions. By taking a home loan with DBS/POSB, they add yet another transaction category, which can potentially up their bonus interest rate further.

(Find out how the couple could potentially earn additional bonus interest.)

And since the pair is likely refinancing (or repricing) at a better interest rate than their initial home loan, they will be paying a lower mortgage each month. That’s additional money saved, which means more savings, and more bonus interest accumulated.

Synergy with other products

DBS also offers its home loan customers a more attractive interest rate on their renovation loan. While Andy and Ling have already renovated their property, they might want to consider refreshing their home in the future.

Afterall, DBS and POSB home loan customers enjoy a renovation loan at a promotional interest rate from as low as 2.68% p.a., versus 3.88% p.a. for non-DBS/POSB home loan customers.

Another perk that new DBS and POSB home loan customers (HDB only) enjoy is a complimentary 6-month coverage by DBS Home Payment Care, an insurance protection plan underwritten by Chubb Insurance.

Paying off your home loan with cash instead of using CPF monies? If you’re thinking of using your surplus cash instead (after setting aside adequate emergency cash and insurance), the monies in your CPF Ordinary Account (OA) can be kept for retirement planning. After all, your CPF nest egg earns at least 2.5% annual interest, which is not to be sniffed at.

How long can you stay committed?

There are home loans with lock-in periods and some without (but these tend to have floating interest rates, or could be slightly higher).

If refinancing...

Right now, as home loan interest rates are low due to the current market situation, it would make sense for Andy and Ling to lock-in a longer tenure fixed rate home loan with their bank to capitalise on the low interest rate environment.

However, in more “normal” times, customers may not want to stay locked-in for too long, lest a more favourable market condition or better offer materialises. People may also refinance if their financial situation has changed, and they need to extend their loan tenure (with the maximum consumed period of 30 years in mind) to lower their monthly mortgage repayments.

If Andy and Ling are thinking of selling their property after the minimum occupancy period is up, they might not want a home loan with a long lock-in period to avoid incurring a penalty when they redeem their home loan (i.e. when they sell their house).

If repricing...

The lock-in period may be a little more flexible for existing bank home loan customers, depending on their contract. Andy and Ling will also be able to lock in the lower rates faster, as repricing generally takes 1 month to process compared to 3 months if they refinance their home loan with another bank or mortgage lender.

For DBS home loan customers, there could be 2 general scenarios:

1. Repricing packages for accounts that are already out of lock-in or will be out of lock-in in 3 months’ time
2. Repricing packages for accounts with free conversion feature — these are designed for customers whose DBS home loan accounts are eligible for free conversion during the lock-in period

Another dilemma: To fix or to float?

Now that Andy and Ling have a clearer idea of what options are available to them, they are still stumped by the timeless dilemma — fixed or floating rates? Which might be more viable or suitable for them? Get more answers from this article.

Ultimately, how much could you save?

Andy and Ling took out a S$700,000 home loan with Bank A for 25 years at 2.35% p.a. (fixed) and a lock-in period of 3 years. Now that they are soon exiting lock-in, they are thinking if they should reprice with Bank A or refinance with Bank B.

Although repricing with Bank A is at a higher interest rate than refinancing with Bank B, after deducting fees, they could save more (about S$3,000) if they reprice. Of course, there are other considerations such as subsidies, synergy with other bank products, possible penalties payable and interest rates after the lock-in period that could turn the tables in favour of refinancing.

Check your detailed mortgage payable with DBS/POSB’s repayment schedule calculator, to ascertain whether it makes sense for you to refinance or reprice. 

Exiting your lock-in period soon? Find out how much you can save if you refinance or reprice with DBS/POSB.

Calculate  how much you can save.

Alternatively, check out other nifty planning tools for your home-owning journey. You can even save your detailed property budget and cashflow timeline reports!

Work out  your Property Budget.

Create  your Cashflow Timeline.

 

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