Refinancing your home loan is a decision that many homeowners in Singapore face at some point. It involves replacing your existing mortgage with a new one from another bank, often with better terms or lower interest rates. But is refinancing always the right choice? This article will explore the three basic options you have as you approach the end of your current mortgage package’s lock-in period.

Option 1: Repricing

Repricing involves switching your existing mortgage to a new mortgage plan within the same bank. Depending on the bank’s policies, you may or may not need to submit a new application, where your current financial situation will be reassessed by the bank.

In terms of speed, repricing within the same bank typically offers the fastest turnaround time, and you can expect your new package to take effect within a month.

Depending on the terms of your current mortgage plan, the administrative cost to reprice will either be free or approximately range from $300 to $800.

The competitiveness of the package offered by your current bank largely depends on their appetite for market share at the time of your repricing window. Generally, banks tend to reserve better packages to acquire new customers.

Option 2: Refinancing

Refinancing involves switching your existing mortgage to a new mortgage plan with a different bank. You will need to submit a new application to your chosen bank, where your current financial situation will be assessed. A guide to retrieve the common documents required can be found here.

If you accept an offer from a new bank, a conveyancing law firm from the bank’s panel will be required to serve a minimum 2 months notice to your current bank. Therefore, it is advisable to start the refinancing process about 3 months before your current lock-in period ends to help buffer some time. 

There are two general fees involved in refinancing to a new bank:

• Legal Fees: Typically range between $1500 to $1800 and can be paid by cash or cpf.
• Valuation Fees: Typically start from $150, depending on the valuation of your property, and are payable by cash

Most banks provide a subsidy to help defray the costs involved, and the amount of the subsidy largely depends on the type of property and the loan quantum. If your current outstanding loan amount falls below $300k for HDB and $500k for private properties, you may not qualify for a substantial subsidy. 

It is important to note that subsidies provided by banks typically come with a 3 year subsidy clawback period. This means that if the loan is redeemed in full (eg. selling of the property, refinancing to a new bank, or paying off your loan in full) within this period, the bank will require you to return the subsidy initially provided to you.

With hundreds of mortgage options available in the Singapore market, the key question is determining which package is the best fit for you, taking into account all relevant factors.

Option 3: Remain Status Quo

It might seem unusual to hear this from a mortgage broker, but sometimes, not taking any action after your current lock-in period ends can actually be beneficial. 

Consider the following examples:

• If the interest rate of your current mortgage plan after the lock-in period is more competitive than the current market rates, there is no reason to commit yourself to a plan with higher interest.

• You would like to fully pay off your loan within 3 months after your lock-in ends, it’s not advisable to commit yourself to a new lock-in period. This is because there would be a penalty of 1.5% levied on your outstanding loan balance if you pay it off in full during the lock-in period.

• If your property is currently on the market and a sale is expected soon, it’s not advisable to commit to a new lock-in period. This is because you would incur a 1.5% penalty fee if you sell the property within the lock-in period. The only exception to consider is if the new mortgage package offers a “full waiver of penalty due to sale” feature. In such cases, a good mortgage broker can be invaluable. They can calculate the breakeven point and, depending on your expected sale completion date, help you make an informed decision about whether switching packages makes financial sense.

A Very Simple Case Study

A client owns an HDB flat with a current outstanding loan amount of $350,000 from Bank B, where she has been a customer for the past 21 months. Her 2 year lock-in period is ending in 3 months time, hence she is in the market looking out for a mortgage plan.

Before Bank B, her mortgage was with Bank A for 3 years, starting from the time when she first purchased the HDB. The move to refinance from Bank A to Bank B would have helped her save $3,200 interest at the end of her current 2 year lock-in period.

As her Minimum Occupation Period (MOP) is ending soon, she is uncertain about whether she will be selling her HDB within the next 2 years. 

She is also contemplating whether it makes financial sense to use $100,000 of her spare cash for a partial repayment, or to save the money for her son’s overseas education expenses, which she may need in a year.

Cost to refinance for HDB:

Legal Fee: $1,500 estimate by cash or cpf
Valuation Fee: $200 estimate by cash
Total: $1,700 estimate

Points to consider:

• When she refinanced from Bank A to Bank B, she received a $2,000 subsidy from Bank B. This subsidy comes with a 3 year subsidy clawback period. If she decides to refinance to Bank C now, there will not be a 1.5% penalty fee levied on her as she will be out of her lock-in period upon the completion of her refinancing. However, she will need to return the $2,000 subsidy to Bank B, as she would have only completed 2 years with Bank B upon the completion of her refinancing to Bank C. Thus technically she would have paid the first set of legal and valuation fees totaling $1,700 out from her own pocket. Hence her true savings over the past 2 years would be reduced to $1,500 instead of $3,200.

• Due to the uncertainty surrounding the sale of her flat, it is a top priority to ensure that the new mortgage plan includes a “full waiver of penalty due to sale feature”. This feature will waive the 1.5% penalty fee levied on the outstanding loan in the event of sale during the lock-in period, providing her with a peace of mind. Without this feature, the penalty fee will be painful; for example, 1.5% of a $240,000 outstanding loan balance would result in a $3,600 fee, while a $340,000 outstanding loan balance would lead to a $5,100 penalty fee.

• Regarding the $100,000 partial payment, she should first consider whether she will be able to raise the funds again if she needs the money one year later. Another factor to consider is that once she makes this partial payment, she will only be able to access this cash again when she sells her property. This is because HDB does not allow borrowers to take out an equity loan from their HDB. Reducing her outstanding loan balance to less than $300,000 will also limit her options in the market. A more prudent choice might be to invest the $100,000 in a short term financial instrument that can earn better interest for the time being.

• To make an informed decision, the first step would be for the mortgage broker to advise her on the options available for the respective loan amounts of $350,000 and $250,000 in the market that include a “full waiver of penalty due to sale” feature. She should also check with her current bank to see if they can offer a repricing package with this feature for the respective loan amounts.

• If her current bank, Bank B, can provide a “full waiver of penalty due to sale feature”, it will be better to reprice even if the rate offered is higher than what Bank C can offer. Doing this allows her to avoid returning the subsidy of $2,000 to Bank B (provided that if she sells, her sale completion date is after 3 years has passed with Bank B), avoids paying any penalty fee in the event of sale during lock-in, and also avoids paying new legal and valuation fees for refinancing to Bank C (as she needs to return the new subsidy Bank C provides if she sells within 3 years). These cost savings will very likely be much higher than the difference in interest rate. Eg 0.40% of $350,000 is $1,400 per annum / $116 per month. 

• If her current bank, Bank B, cannot provide a “full waiver of penalty due to sale” feature, but Bank C can, further calculations will be needed. She would first need to decide whether she wants to make the $100,000 partial repayment and for how long she can commit to not selling her HDB. Assuming she decides to not make any partial repayment and commits to not selling for 1 year. It will make sense to refinance to Bank C that provides a “full waiver of penalty due to sale feature”. For example, if the interest rates offered by Bank C is lower by 0.40% p.a as compared to Bank B, and her outstanding loan balance after 1 year is $340,000 and she sells her HDB then; She would have saved $1,400 worth of interest and $5,100 in penalty fees, totaling to $6,500. Her cost involved would include 2 sets of legal fee and valuation fee; one for refinancing from Bank A to Bank B, and another for refinancing from Bank B to Bank C. This sums up to a total of $3,400 estimate, and her nett savings would still be around $3,100.

Food for Thought

Indeed, there are many factors to consider before making an informed decision about your mortgage. There is no one-size-fits-all solution, as each case by itself is unique and every individual has their own perspective. In more complicated scenarios where a private property is involved instead, the client may even be considering decoupling or taking an equity loan. These then add on further factors to consider before making the right move to execute. The role of a mortgage broker is to provide insights regarding interest rates, timelines, and calculations, helping you navigate the complexities of such mortgage decisions.

If you have any mortgage concerns, do consider reaching out for a free and non-obligatory consultation.