Is it time for you to refinance?

If you have an HDB loan, you have no problem.

But if your home loan is from a bank, you could be paying too much.

As it turns out, it is easy to pay less. I will tell you how.

I conducted an informal survey of six people with bank home loans and asked: ‘When does your lock-in period end?’

That is the date when the bank no longer charges you a penalty for refinancing your home loan. The lock-in is usually two years for variable rate and three years for fixed-rate loans.

Surprisingly, no one knew exactly when their lock-in ended.

What is more, three of the six discovered they had already passed their lock-in periods.

It means they could save money by refinancing their home loans now.

Next, I contacted our three local and five foreign banks that offer home loans.

I wanted to know what efforts, if any, did they make to inform customers of the savings from refinancing their home loans.

The easiest would be for banks to let customers automatically convert their home loan to the lowest rate at the end of the lock-in period.

All borrowers would benefit from such an option.

One bank told me it does this but only for its elite bank customers.

It does not extend the service to the masses.

As a rule, you are on your own when it comes to refinancing.

Don’t expect your bank to notify you.

The reason, I think, is obvious: Banks make more money when they do not teach customers how to save money by paying them less.

Two of the six people that I interviewed learnt about refinancing the hard way.

They agreed to tell their stories but want to be known only by their first names, Jerry and Martin.

Jerry, 53, is the kind of guy who follows the rules.

If he is waiting to cross the street and the traffic light is red, he will wait until it turns green, even though no cars are coming.

If his bank tells him to pay 5.75 per cent interest, he will pay it. No arguments.

Jerry lives with his wife and son, Kevin, in a condominium unit they purchased for $688,000 in 1999.

Rates for the first three years were 3.5, 4.5 and 4.75 per cent.

In 2002, they refinanced and paid 3, 3.25, 3.50, 4.75 and 5.75 per cent for years 1, 2, 3, 4, 5 and onwards.

Jerry is now paying the top rate of 5.75 per cent.

I asked: ‘Why don’t you refinance so you can go back to paying the bank’s first-year rate of 3.25 per cent? You will save a lot.’

Jerry told me he couldn’t do that because his bank allows only one refinancing.

Huh? I had never heard of a perpetual lock-in lasting until the end of the loan.

I asked Jerry to check with the bank. He did and sure enough, the lock-in was only three years.

NO PENALTY

It means he can refinance now with no penalty.

It is both good and bad news. The good news is Jerry’s home loan rate will drop from 5.75 to 3.25 per cent. He will save more than $50,000 in interest costs.

The bad news is Jerry could have refinanced long ago. He has paid the bank thousands of dollars unnecessarily.

Jerry said: ‘I’m not sure where I got the idea that I could refinance only once. But I am sure that the bank didn’t explain refinancing to me until I brought it up. It would have saved me a lot.’

Martin, 48, has a similar story.

He is paying 5 per cent interest on his home loan, which is high. I encouraged him to check to see if he is eligible for a lower rate.

Sure enough, he is past his two-year lock-in period so he can refinance without paying the 1.5 per cent penalty. He told me he intends to refinance, which will bring his home loan rate from 5 per cent to 3.25 per cent.

Using the ‘total interest calculators’ at www.cpf.gov.sg , Martin estimates his savings at $60,000 over the term of the loan.

Source : Straits Times - 17 Apr 2007