Refinancing vs Repricing Home Loan: What’s The Difference?

Refinancing vs repricing may sound similar, but they certainly aren’t the same. Find out if you should refinance or reprice your home loan.

Are you a homeowner who has taken out a home loan or personal loan from the bank to pay your mortgage? You definitely have options when it comes to shaving the overall amount of interest that you have to pay. Look no further than refinancing or repricing your home loan.

Fret not if you aren’t sure how refinancing or repricing works or which is the better option for you. In this article, we’ll cover the following: 

Repricing vs refinancing: What’s the difference?

Repricing lets homeowners switch to a new, more competitive home loan package within the same bank. As repricing can be executed fairly quickly, homeowners usually get to enjoy the new home loan package within one month, and in turn the possibility of enjoying interest savings earlier. 

Refinancing refers to the closing of one’s current home loan account with the bank, and setting up a new home loan account with another bank. How does it work? When you refinance, you are basically taking out a loan with the new bank to pay off your existing loan with your original bank. 

Both strive to reduce the interest rate charged for the home loan and monthly repayment amount.

Why do people refinance or reprice their home loan?

Repricing and refinancing allow homeowners to switch their home loan package to a new one that offers savings, or one that suits their existing needs better. 

Most often than not, cost savings is the main reason why homeowners choose to refinance or reprice their home loan. After all, such savings can be pretty substantial. The savings in monthly mortgage payments can definitely be put towards defraying the cost of things like childcare fees, utility and grocery bills. 

Who can refinance or reprice their home loan?

EC and private property homeowners as well as HDB homeowners who have taken out a bank loan can refinance or reprice their home loan. 

To avoid unnecessary early repayment penalty fees and charges, be sure to refinance or reprice after your locked-in period, if any. The early repayment penalty fees can be very significant! 

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Things to consider before you refinance or reprice your home loan

The number one thing you need to do before committing to a new home loan package is to do your sums. Here’s a checklist that you can follow when doing your homework:

#1 Shop around for different home loan packages

Ask yourself if you’re more comfortable with fixed rates (less volatile) or floating rates pegged to SIBOR or SOR (more volatile but transparent). Some home loan packages are also pegged to the bank’s board rate or fixed deposit rate (more volatile but less transparent). Learn more about fixed vs floating home loan rates. 

When should you consider fixed rate home loans? 

When interest rates are low and you would like to budget with certainty over the first couple of years of your home loan. Some people also go for fixed rate home loans when they anticipate interest rates to rise. 

When should you consider floating rate home loans?

When you want to take advantage of a falling interest rate environment. Some people opt for floating rate home loans as they foresee themselves repaying their loan ahead of time — lock-in periods may allow for partial repayment without penalty.

#2 Choose a loan tenure that best suits you

In general, a shorter loan tenure translates into higher monthly instalments, but lower overall interest charges. The reverse is true: a longer loan tenure equals lower monthly instalments, but higher overall interest charges. 

#3 Consider your age

Your Loan-to-Value limit (i.e. how much you can actually borrow) is dependent on your age. For joint borrowers, an average age is used. Learn how the LTV limit is computed. 

#4 Calculate the costs of refinancing and repricing

When calculating, consider: the total interest payable, potential interest savings, early repayment fees, valuation and legal fees (if refinancing) and repricing fees (if repricing).

#5 Work out your net savings for both options

Some banks might waive the repricing fees while others might not. Also, some banks might offer cash rebates for refinancing with them meant to offset the legal and valuation fees incurred! Be sure to take these into consideration when computing your net savings. 

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Should you refinance or reprice your home loan?

You should refinance or reprice your home loan only if there are cost savings to be had — you need to do your sums to determine how much you can potentially save if you refinance or reprice your home loan.  

While repricing is more straightforward compared to refinancing, it pays to note that the interest rates for refinancing are typically more attractive than those meant for repricing. However, refinancing comes with its own slew of legal and valuation costs that you need to take into consideration. 

Aside from more paperwork, you also need to make sure you’re eligible to refinance your home loan with another bank. This means meeting the Total Debt Servicing Ratio (TDSR) requirements and making sure your finances are healthy. 

If you’re earning less now, you might want to consider repricing first. For the most part, you get to avoid the credit assessment that would likely reduce the amount of loan you can get from the new bank!

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