Tuesday, October 13, 2009

Putting off refinancing your mortgage could be a big mistake.

TNP Illustration: SIMON ANG
Last week, Mrs Money and I refinanced ours.
We used to live in an HDB flat and enjoyed HDB's 2.6 per cent interest. It is still the best loan deal in town.
If you have one, don't switch to a bank loan and don't even think about paying it off early.
That's because if you pay using your CPF, you are using money that earns 2.5 to 3.5 per cent interest to pay a loan that costs only 2.6 per cent. It's a bad move.
After 10 years in our beloved HDB flat, we moved to an executive condo. It is in a narrow niche between HDB and private property. Since we no longer qualify for an HDB loan, we now have to deal with the banks.
Ours had been charging us 3.5 per cent interest. Last month, the one-year lock-in ended and the bank sent a letter saying they were increasing our home loan rate to 3.75 per cent.
Whoa. I told Mrs Money: 'Something's not right here. Falling interest rates mean banks lower our fixed deposit rate. But they raise our home loan rate!'
I later found out 3.75 per cent is a 'sucker's' interest rate. It is for people who are told to pay more, so they do. They don't argue. They don't fight back. They don't refinance.
I called all the banks and got another surprise. They charge a lot less than the 3.75 per cent our bank was charging us.
The best deals are 'pegged rates'. They peg the interest to a benchmark like the Singapore inter-bank offer rate (Sibor) or the swap-offer rate (Sor). These rates are low and published daily in Business Times.
A typical pegged rate is the three-month Sor plus 1 per cent. Sor is now 1.35 per cent so you would pay 1.35 + 1 = 2.35 per cent per year.
I informed our bank that we would be moving our home loan to a bank charging us only 2.35 per cent.
Our bank suddenly became very friendly and offered us the same good deal.
Like magic, our home loan rate was cut almost by half, from 3.75 per cent to 2.35 per cent. Without my asking, the bank also waived its $500 loan conversion fee.
As we were leaving, I asked a throw away question: 'By the way, is that your lowest rate?'
The banker hesitated, then said: 'Actually, our lowest rate is not the 2.35 per cent you are paying. It is 2 per cent (Sor + 0.65 per cent). But it only applies to new customers. Sorry.'
I explained that I could go to another bank where I would be considered a new customer and entitled to their special rate. Our bank executive said: 'Oh... well... that's not necessary.' Then he gave us the lower home loan rate of 2 per cent.
For me, a big lesson learnt has been that banks deal with thousands of customers. Customers, however, talk to just a few banks. It is no contest.
The banks have developed tactics that we cannot begin to match.
On the other hand, consumers are not powerless. It helps to know that other banks are hungry for our business. Competition makes the contest a bit fairer.
The second lesson is that life is unfair. It favours the rich. The lowest rates - 2 per cent - are reserved for private home loans.
For HDB flats, bank borrowers pay more. Variable rate loans start at 3.5 per cent.
Shop around and you can negotiate down to 3 per cent. With a two or three year lock-in, you can get an even lower interest rate, but not as low as for private property.

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