Refinancing and repricing; Most people confuse these terms and use them interchangeably ‘cause well, they’re both essentially pointing to switching up your loan for another with lower interest rates! So what is the difference between the two terms?
Well, for one, and the easiest of them to remember: Repricing is switching your mortgage loan within the same bank, while refinancing is switching your mortgage loan for another at a different bank.
Besides this, the only other differences are their costs and the process of switching your loan.
But if you remember what I just told you, it’s easy to understand the 2 differences.
As I’ve just mentioned above, repricing is done within the same bank you’ve chosen for your original mortgage loan while refinancing is switching for a mortgage loan with another. Hence, refinancing involves a more tedious process.
Think of repricing as recontracting your mobile line with your current telco. And refinancing as a swapping providers; Once you’ve ditched your current telco (old bank), you’ve got to settle a few things to get started with your new provider (new bank).
While the new bank can’t wait to start a new relationship with you, they’ll need around 3 months to get everything set up and sign the new contract (your new mortgage plan). During this period, they would need to access your past (debts) and how you’ll be able to commit to a new relationship.
So you’ll need to resubmit all your credit cards, your car loans, and all other information on any other debts to the new bank. Then, the new bank would get their lawyers to formalize the new contract by shifting your mortgage over, which is kinda like porting your current mobile phone number over.
Repricing on the other hand, is much simpler.
You go to the bank because you saw a better deal and don’t have to jump through too many hoops because you are an existing customer.
The bank proposes a new (mortgage) plan to solve your problem (interest too high) and voila! The changes take effect as early as the next month.
When you refinance, you’ll have to pay for the following:
1) At your new bank:
– $1,800 (HDB) and approximately $2,500 (private) for legal fees
– $200-300 (HDB) and $450 & above (private) for valuation fees
If your current bank had at any time subsidised the above fees for you, you’d have to pay them back in full if you’ve not met the standard 3-year clawback period. If that happens, you’ll be paying twice the amount for the above fees. Unless your new bank decides to subsidize your legal fees on their end.
2) At your current bank:
1.5% of your outstanding loan amount (If you’ve not fulfilled the lock-in period of 1-3 years).
Your current bank will charge you what I’d like to call a break-up fee ’cause you divorced them even though you promised you’ll stay (the lock-in period). So the bank will charge you a fee of 1.5% your outstanding loan amount as penalty.
Repricing on the other hand, has lower incurred costs. Besides a fixed conversion/admin fee, there’s no other charges. These usually range between $200-$800, depending on the bank. Most local banks these days charge $800.
Other small differences
Other small differences to take note of are that for most banks to allow you to switch to another bank, your loan amount usually has to be larger than $100,000.
Also, since refinancing takes so much more longer than repricing to process, you’d naturally have to get your conveyancing law firm to notify the banks approximately early (3-7months in advance) so they can shift your mortgage in time.
When we’re talking interest rates, there is no guaranteed way to tell you which option gives you better interest rates, since they’re dependent on individual banks. Just know that banks DO NOT give out rewards/bonuses for being a loyal customer. On the contrary, interest rates offered to acquire new customers are normally better than those looking to reprice.
So should I reprice or refinance?
In general, you should refinance only when your lock-in period for your mortgage loan is about to end, and if your loan is above $300,000 for HDB, or $500,000 for private properties.
That said, if you just die die need to extend your loan tenure (i.e. you don’t care whether you’re paying more in the long-term, you just want to lower your monthly repayments), then go ahead and refinance.
If your lock-in period is not fulfilled, the 1.5% lock-in penalty charged together with all the other fees may outweigh the savings you get from refinancing. Furthermore, your new bank will not subsidize the legal costs incurred from refinancing if your loan is below $300k (HDB) or $500k (private).
Bottom line: Refinancing’s fine if you calculated to breakeven within a year, but if you can’t, then repricing would be better due to their lower costs ($800). If you’re having trouble figuring out what you should do, head on over to MoneySmart’s Refinancing Wizard and get your questions handled by their Mortgage Specialists for free!
Have any tips on repricing and refinancing? Share them with us! We’d love to hear from you.
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