Refinancing vs Repricing: What the Fed’s Rate Cuts Means for Homeowners in Singapore

This post was originally posted on Planner Bee.

With the US Federal Reserve making interest rate cuts, homeowners in Singapore often wonder how these changes affect their mortgage and whether they should consider refinancing or repricing their home loan. Understanding the key differences between these two options and how external factors like the Fed’s rate decisions impact your mortgage can help you make an informed choice.

What is refinancing?

Refinancing involves switching your home loan from your current bank to another bank that offers a more attractive interest rate or better terms. Essentially, it’s a fresh start with a new loan, allowing you to capitalise on lower interest rates or different mortgage structures.

Advantages of refinancing:

1. Lower interest rates: If other banks offer significantly lower rates due to market conditions, refinancing could help you save on interest payments. 2. Flexibility: You may choose to extend or shorten the loan tenure, or switch from a fixed rate to a floating rate, depending on your financial situation. 3. Promotional packages: Banks often offer attractive refinancing packages to lure new customers, which may include subsidies for legal fees and valuation fees.

Disadvantages of refinancing:

1. Costs: There are upfront costs like legal and valuation fees. While banks may offer subsidies, these costs could still add up. 2. Time and effort: Refinancing requires submitting documentation, undergoing property valuation, and waiting for approval, which can take time. 3. Lock-in period: If you are still within the lock-in period of your current loan, you may face hefty penalties for refinancing too early.

What is repricing?

Repricing, also known as conversion, is the process of adjusting the interest rate of your current home loan with your existing bank. Unlike refinancing, you remain with the same bank, but the terms of your mortgage are adjusted, often to a new interest rate.

Advantages of repricing:

1. Convenience: Since you’re staying with the same bank, the process is typically faster and requires less paperwork. 2. Lower costs: Repricing typically involves lower costs compared to refinancing. There may be an administrative fee, but you avoid legal and valuation fees. 3. Maintain relationship with current bank: Some homeowners prefer to stay with their existing bank if they have had a positive experience, or if their bank offers competitive repricing packages.

Disadvantages of repricing:

1. Fewer choices: You are limited to the interest rate and mortgage products offered by your current bank, which might not be as competitive as other banks’ refinancing options. 2. Possible lock-in period: After repricing, you may be subjected to a new lock-in period, which limits your flexibility if interest rates fall again.

How do Fed rate cuts affect your mortgage?

The US Federal Reserve’s interest rate cuts can have a ripple effect on global interest rates, including in Singapore. When the Fed cuts rates, banks may respond by lowering interest rates on mortgages, particularly those with floating rates pegged to benchmarks like the Singapore Overnight Rate Average (SORA).

However, it’s important to note that while the Fed’s rate cuts can lower mortgage rates, Singaporean banks are also influenced by domestic factors, such as the Monetary Authority of Singapore’s policies and the state of the local economy. Therefore, you should monitor both local and global trends before making any decisions.

Refinancing vs repricing: Which should you choose?

The decision between refinancing and repricing depends on several factors:

1. Interest rate difference:

• If a different bank offers a significantly lower interest rate compared to your current bank, refinancing may be more attractive despite the higher initial costs.
• If the difference is marginal, repricing with your current bank could be the better option, as it involves fewer fees and less hassle.

2. Current loan tenure and lock-in period:

If you are near the end of your lock-in period, refinancing becomes more viable. However, if you are still within the lock-in period, repricing might be more practical to avoid penalties.

3. Loan amount

For larger loans, even a slight difference in interest rates can lead to significant savings. Refinancing to a lower rate may result in greater savings over the long term.

4. Cost considerations

Calculate the overall costs of refinancing versus repricing. Even if refinancing offers a lower rate, the legal, administrative, and valuation fees might outweigh the savings unless the rate cut is significant.

For instance, refinancing involves switching to another bank, which typically incurs legal and valuation fees amounting to S$3,000 or more. In contrast, repricing allows you to secure a better rate with your existing bank, though you may still need to pay a conversion or administrative fee, usually around S$800.

5. Long-term financial plans

If you plan to hold onto your property for the long term, locking in a lower fixed rate through refinancing might offer peace of mind. However, if you anticipate selling the property or paying off the loan early, flexibility might be more important, making repricing a better fit.

6. The administrative work involved

Another factor to consider is the amount of administrative work involved. Opting for refinancing over repricing involves several steps:

• Serving notice to your current bank
• Conducting a property valuation for the new loan
• Engaging lawyers to handle the conveyancing for the refinancing process

On the flipside, when you reprice with the same bank, you can skip the above steps, which makes the process simpler and more straightforward.

Make an informed decision based on your needs

The US Fed’s rate cuts can create an opportunity for homeowners in Singapore to benefit from lower mortgage rates, but deciding between refinancing and repricing depends on your individual financial situation and loan terms. If you’re looking for greater flexibility and long-term savings, refinancing may be the way to go. On the other hand, if convenience and lower upfront costs matter more, repricing might be the more practical option.

Before making a decision, it’s wise to consult a mortgage advisor or do a thorough comparison of different options to ensure you’re maximising your savings and getting the best deal for your financial goals.

At Planner Bee, we can help you with a personalised quote. Simply submit your interest here, and relieve yourself of the burden of researching home loans as we will simplify the process for you. Our Mortgage Specialist will personally reach out to you, saving you valuable time for other priorities in life.

Read more: Managing Rising Home Loan Interest Rates: Should I Pay Off My Mortgage Early?