In recent news, there was a report about banks experiencing an increase in the number of home loan refinancing applications. This was because banks have lowered their interest rates on loans that are pegged to the Singapore Inter-Bank Offered Rate (SIBOR).
SIBOR is the rate at which banks borrow from one another and because of the coronavirus pandemic disrupting the global economy, it has been trending downwards in recent months.
While my mortgage loan with DBS is pegged to the bank's fixed deposit interest rate, I was interested to find out if DBS has any new promotions for mortgage loan repricing.
Repricing is switching your mortgage loan to a new package within the same bank, while refinancing home loan is switching your mortgage loan for another at a different bank. It is cheaper to reprice than to refinance, especially when there's no revaluation of the property as there are cost savings on the legal and valuation fees.
My outstanding mortgage loan for my property is left with around $150,000 and because of that, I'm at a precarious stage banks rarely offer low interest rates for small mortgage loans like mine. At the same time if I were to refinance with a different bank, the legal and valuation fees would eat into any interest savings I receive from refinancing my mortgage loan.
This means I'm limited to the repricing option for my mortgage loan with my existing bank.
Fortunately, I found out that DBS is having an attractive mortgage loan promotion for loan amount above $100,000. You can click here to learn more about DBS mortgage loan promotions. The icing on the cake is that they are having a discount on the processing fee so it'd only cost me $300 to reprice my mortgage loan with DBS.
Opting for the DBS 5 year fixed-flexi rate package
I'm particularly interested in the 5 year fixed-flexi rate package which allows me to lock in my mortgage loan repayment at 1.5% per year for the next 5 years. In exchange, I won't be able to sell my HDB flat and I cannot make a full settlement of my mortgage loan for the next 5 years without incurring a fee. I have no issue with these two conditions.
The added benefit of this mortgage loan package is that I will have the flexibility to paydown part of my mortgage loan within the lock-in period without incurring any additional fees. There is also a free conversion after 12 months from 1st disbursement, allowing me to reprice your home loan at no cost, very useful if the interest rates continue to fall over the next year.
At the end of the 5-year lock-in period, the interest rate of the mortgage loan will be pegged to 24-month Fixed Deposit Home Rate (FHR24) + 0.9% spread. FHR24 is calculated based on the prevailing twenty-four (24) months Singapore dollar fixed deposit interest rate of DBS Bank for amount within S$1,000 to S$9,999 or such other sum that the bank may specify.
I'm particularly keen in the 5-year lock-in period because it fits perfectly into my Financial Independence, Retire Early (FIRE) strategy.
Achieving financial independence with a mortgage debt
Many FIRE enthusiasts advocate paying off all debts, including mortgages before retiring. I used to have the same mindset many years ago when I started planning my FIRE strategy. I've learnt to be less debt averse over the years as my financial safety nets started taking shape.
I intend to retire early with my mortgage loan intact.
As I chose to be prudent and purchase a HDB flat below my means, my monthly CPF contribution is more than the amount needed for my monthly mortgage loan repayment. That means as long as I am working, my CPF Ordinary Account will continue to grow, at a slower rate.
I intend to continue working for a number of years to grow my CPF Ordinary Account to a sizeable amount where together with the yearly interest, it is able to pay off my monthly mortgage loan repayment even after I decide to stop working.
That magical age based on my calculations is 42. That's right, I just need to continue working till the age of 42 and I would have enough money in my CPF Ordinary Account to continue paying off my monthly mortgage loan repayment. Thereafter, my mortgage loan will no longer be one of the reasons why I'm still working at the age of 43.
Grow your CPF Ordinary Account by refinancing or repricing your mortgage loan often
I used to procrastinate when it comes to refinancing or repricing my mortgage loan in the past and that costed me a lot of money paid in the name of mortgage interest.
The fact is, if you are prudent in managing your mortgage loan and refinance or reprice your mortgage loan often, you will save a lot of money that would have been spent on mortgage interests.
If you are using money in your CPF Ordinary Account to pay for your monthly mortgage loan repayment, that would mean more money is retained in your CPF Ordinary Account.
There are 2 benefits to this:
- The money saved will continue to earn 2.5% interest each year in your CPF Ordinary Account.
- Because you are using lesser money in your CPF Ordinary Account for your mortgage loan, there will be lesser accrued interest of 2.5% generated each year.
Here's a snapshot of how my CPF Ordinary Account looks before and after my mortgage loan repricing.
By repricing my mortgage loan to a lower interest rate, I will accumulate an additional $12,817.56 just saving on mortgage interest at the age of 55.
Caveat: My calculations are based on the assumption that the monthly mortgage loan repayment remains at FHR24 + 0.9% spread. We know nothing remains constant so I'll be more active in repricing my mortgage loan in future.
Strategise your own mortgage loan game plan
Don't mistake this article as an inducement to refinance/reprice to the DBS 5 year fixed-flexi rate package like I did. Just because it works for my long term strategy does not mean it'd work for yours.
Take a look at your mortgage loan contract. If you are no longer locked in and are free to refinance or reprice your mortgage loan, take a look at all the mortgage loan promotions in the market that your mortgage loan qualifies for. If your mortgage loan is more than $250,000, you'd most likely have more options than I do. Make sure that you are aware of all the costs involved in the process.
Take a spreadsheet and assess how refinancing or repricing benefits your finances. I'm. quite confident that you will see the advantages of refinancing or repricing.