One of the implications of the elevated interest rates environment set by the United States Federal Reserve is the increased cost of borrowing. In recent months, though, interest rates have been on a downward tick.
For most, your home loan is the largest kind of debt you will hold, and you may be rightfully concerned about how a dip in US interest rates will affect your home mortgages.
Some of the tools available to manage your home loan repayments is to do a refinancing or repricing.
Read Also: How Much Cheaper Will Your Home Loan Repayments Be If Interest Rates Drop By 0.5%
Refinancing VS Repricing
To be clear, both refinancing and repricing fulfill the same purpose: to optimise the terms of your home mortgage, for instance, to reduce monthly repayment amounts or reduce the total amount of interest you pay.
Refinancing is when you switch your existing home mortgage to a new one with another bank. In this case, you change the bank that you are taking the loan from.
Repricing means you get a new home loan package with your existing bank. In such instances, you remain with the same bank.
When you change your home loan from an HDB loan to a bank loan, you are also performing a refinancing. However, this is unlikely to be a wise choice given the interest rates right now. The Concessionary HDB Housing Loan is still charging an interest rate of 2.6% p.a., while the lowest bank home loan rates are in the region of 2.5% to 3.0% p.a.
Read Also: Complete Guide To Taking A Concessionary HDB Housing Loan
Differences In Cost And Fees
There are some differences between refinancing and repricing, such as in cost, timeline, and regulations, that you need to know about before deciding which makes better financial sense.
In general, refinancing will incur higher additional costs, compared to repricing.
Cost of repricing:
When you perform a repricing, your bank will usually just charge an admin fee, which can range anywhere from $500 to $1,000.
As you remain with your existing bank, there are less administrative burden on both you and the bank. This will also result in fewer cost items that the bank will incur and likely pass on to you.
Costs of refinancing:
Because you are establishing a new mortgage with a new bank, there will be legal fees and costs for valuing your property. For substantial loan amounts, your new bank may offer subsidies to help defray these costs. In total, these costs can range from $2,000 to $3,000.
If you are still within the lock-in period of your mortgage, you will be required to pay a penalty to switch banks, which is around 1.5% of the outstanding loan amount.
In addition, if you took advantage of legal or valuation subsidies by your current bank, look out for a separate clawback clauses that requires you to pay back the subsidies you enjoyed.
Read Also: HDB Or Bank Loan: Pros & Cons To Consider Before Deciding On Which Housing Loan To Take
When Can You Do Refinancing/Repricing?
Lock-in periods of home loan packages are usually between one to three years. During this period, it will not make much sense for you to try to change the terms of your mortgage (by doing a repricing or refinancing) because the penalty would wipe out any savings of a new package.
Mortgage brokers are known to be insanely hardworking to push through all the paperwork as quickly as humanly possible, but the process still takes time.
Repricing takes about 1 month to effect. You should aim to engage your bank or mortgage broker about 2 to 3 months before the end of your lock-in period.
Since more entities are involved in refinancing, the entire process of refinancing usually takes at least 3 months.
So, if you’re thinking of doing refinancing, you can start to approach brokers or compare home loan packages about 4 to 5 months before your lock-in period is up.
Regulations And Other Things To Note
When performing refinancing or repricing, you will need to check if you are within the limits imposed by the Total Debt Servicing Ratio (TDSR) framework. TDSR limits do not apply to mortgages where you are living in the house, but will apply to loans taken on an investment property.
If you’re at the tail end of your mortgage, you may not be eligible for refinancing, since most banks will only offer you a refinancing package if your outstanding loan amount is more than $100,000. That’s why you should pay close attention to your remaining loan amount, and make some projections on timing when you plan your home loan repayment terms.
When refinancing or repricing, do take note of the promotional first-year rates as well, and you should base your decision on the entire lock-in period rather than just fixate on this.
A home loan is a large, long-term commitment, so you should take your time and carefully plan your finances.
Check out the latest home loan rates, courtesy of our friends at Redbrick. You can also use this handy widget to review the latest home loan rates and make an enquiry for a non-obligatory discussion about your refinancing options.
Read Also: Guide To Understanding How SORA-Pegged Home Mortgage Loans Work
The post Refinancing VS Repricing Your Home Loan: What Are The Differences? appeared first on DollarsAndSense.sg.
