Refinancing vs. Repricing: What's the Difference?
When managing your home loan in Singapore, you’ll eventually face an important financial decision: should you refinance or reprice your mortgage? While these terms sound similar, they represent distinctly different approaches to optimizing your home loan. Let’s break down these concepts in clear, practical terms to help you make an informed decision that suits your financial situation.
Why Consider Refinancing or Repricing?
Refinancing or repricing your home loan isn’t just about switching packages—it’s about optimizing your financial situation. Here’s why homeowners in Singapore typically explore these options:
- Lower Monthly Payments: By securing a lower interest rate, you can reduce your monthly repayments, freeing up cash flow for other financial goals.
- Interest Savings: Every reduction in interest rates can lead to substantial savings over the life of your loan. Why pay more when better rates are available?
- Secure better features: While saving on interest, you may also want to enjoy features offered by certain banks such as the flexibility to sell or pay down your outstanding loan amount without penalty during the lock-in period.
- Achieving Financial Goals: Whether you’re looking to pay off your mortgage faster or reduce your monthly burden, choosing the right option can help you reach your financial objectives sooner.
Considering your unique financial situation and future plans, refinancing or repricing could be a strategic move to maximize savings and enhance your financial well-being.
Additionally, if you’re unsure about how much you can borrow based on your current income and financial situation, you can use our Loan Eligibility Calculator to get a clearer picture.
What Exactly Are Refinancing and Repricing?
Refinancing means transferring your existing home loan to a new loan package with a different bank. This process involves closing your current loan account and establishing a fresh one with another financial institution. When you refinance, you’re essentially “shopping around” across Singapore’s banking sector to find the most competitive rates and terms. This option often appeals to homeowners looking for significant cost savings, this process is made simple with the help of mortgage brokers. A good broker will be able to do a detailed breakdown comparison on the best options currently in available in the market, and the best of all – their service is free.
Repricing involves switching to a new home loan package while remaining with your current bank. You’re essentially renegotiating the terms of your existing loan while maintaining your relationship with the same lender. Repricing is often called an “internal refinancing” because you’re restructuring your loan within the same institution.
The Refinancing Process: A Closer Look
When you refinance your home loan, you’re essentially starting fresh with a new bank. Here’s what the process typically involves:
- Research phase: About 3 months before your lock-in period ends, start doing your homework by enquiring with different banks on their offerings. Or simply consult us!
- Application: Submit an application to the bank with the necessary documents that include but are not limited to:
- IRAS
- Your NRIC or passport
- Latest tax Notice of Assessment
- Recent 3 months’ payslips
- CPF contribution history (last 15 months)
- Property valuation: The new bank will conduct a fresh valuation of your property.
- Legal work: A lawyer (must be on the bank’s panel) will handle the legal aspects of transferring your loan.
- Notice to current bank: Law firm will need to serve a minimum 2 months notice to your current bank before the refinancing can be completed.
- Loan completion: Once approved, your new bank will settle the outstanding amount with your current bank.
Lets look at a simple scenario: If you have an outstanding loan amount of $1,000,000 with Bank A at a 3.5% p.a, and you refinance to a lower rates of 2.5% p.a. You would have saved a neat $10,000 in just 1 year! Essentially paying for your next holiday destination!
For those unfamiliar with retrieving essential documents like IRAS notices, our step-by-step guide on Our Step-by-Step Guide to Retrieve HDB, CPF, and IRAS Documents can help streamline the process.
The Repricing Process: A Closer Look
Repricing could be a simpler process as you’re staying with your current bank:
- Check available packages: Contact your bank to inquire about current home loan packages available.
- Application: Similar to refinancing, submit an application along with the necessary documents to your current bank.
- Administrative Fees: Depending on your current package, it could either be FOC or set you back by a few hundred dollars (typically around $500).
- Implementation: The new package will typically take around 5 weeks to take effect.
Key Factors to Consider: Making an Informed Decision
1. Lock-in Period and Penalties
Before making any move, check if you’re still within your loan’s lock-in period. Most home loans in Singapore have a lock-in period of 2-3 years, during which you’ll face penalties for early redemption—typically 1.5% of the outstanding loan amount.
For example, on a S$500,000 loan, this penalty could amount to S$7,500—a significant sum that would likely erase any potential interest savings from refinancing or repricing.
2. Subsidy Clawbacks
When you first took out your loan, your bank may have offered subsidies for legal and valuation fees. These subsidies typically come with a clawback period of 3 years.
If you refinance during this period, you’ll need to repay these subsidies (usually S$2,000-S$3,000). This is an important consideration when calculating the total cost of refinancing.
3. Total Debt Servicing Ratio (TDSR)
When refinancing or repricing, you’ll need to meet the current TDSR requirements, which limit your total monthly debt obligations to 55% of your gross monthly income. If your financial situation has changed (new loans, change in income), you might face difficulties passing TDSR. To understand how TDSR works, refer to our detailed guide on Breaking Down the TDSR: Your Key to Understanding Loan Affordability .
In certain scenarios, you may qualify for a TDSR waiver. This typically applies for Owner-Occupied Properties. For Investment Properties, the banks will usually require the borrower to pay down 3% of the outstanding loan amount if TDSR fails.
4. Interest Rate Environment
Consider the broader interest rate environment:
- In a rising interest rate environment, locking in a fixed rate might be advantageous
- In a falling interest rate environment, a floating rate might be more beneficial
For instance, in early 2024, when interest rates were rising, many homeowners opted to refinance to fixed-rate packages to shield themselves from further increases.
When to Refinance vs Reprice
Consider Nett Savings of Both Options
Example:
Loan Amount: $1,000,000
Option 1: Repricing
Cost to reprice:
$500 admin fee
Repricing interest rate:
2.60% Fixed for 3 Years
Option 2: Refinancing
Cost to refinance:
Legal Fee: $1800
Valuation Fee: $400
Subsidy Provided By New Bank: $2500
Nett Cost: Nil (You gain extra $300 cash to change banks)
Refinancing Interest Rate:
2.40% Fixed for 3 Years
You save 0.20% p.a which is approximately $2000 more per year.
Hence in this case refinancing is better as you will save $6000 more interest over 3 years and also gain an extra $300 cash due to the higher cash subsidy. Compared to paying $300 out of pocket to reprice at a higher interest rate.
Consider Features of Both Packages
Asides from overall interest savings, features play an important role that will help you make a more informed decision.
- Do you require the flexibility to sell without paying the 1.5% penalty fee on outstanding loan amount during lock-in?.
- Do you require the flexibility to make partial repayment without paying the 1.5% penalty fee levied on partial repayments during lock-in period?
- Do you require the flexibility to exit this package earlier to potentially switch to a lower rate?
These are considerations that we will need to address on a case by case basis in order to help you understand your unique situation and have a more holistic view on the short and long run effects.
Refinancing vs. Repricing: A Quick Summary
| Feature | Refinancing | Repricing |
|---|---|---|
| Definition | Switching loan to a different bank | Switching to a new loan with the same bank |
| Notice Period | 2 months | 1 month |
| Legal Fees | $1,500 – $1,800 est | None |
| Valuation Fees | Typically $150 to $1,000+ (depending on valuation) | None |
| Admin Fees | None | $500 – $1,000 |
| Interest Rate Options | Full market range | Limited to current bank’s offerings |
Read to take the first step?
Consider connecting with us.
We will help assess your unique situation and advise on what option makes the most financial sense.
Remember: The optimal choice depends on your specific financial situation, current market conditions, and long-term property plans. By carefully weighing all factors, you can make an informed decision that optimizes your home loan for years to come.
