Important clauses to look for when refinancing
Lock in period
Look into your Letter of Offer (LO), the part that state lock in period. If you are under lock in, there will be a penalty if do a home loan refinancing (usually the penalty is 1.5% of the outstanding loan amount). Thus, it is important to know when the lock in period is ending. Important thing to note – if the lock in period is 2 years, the 2 years lock in starts from the date of 1st disbursement of the home loan and not the date of the LO signed. This is a very common mistake assuming the 2 years lock in starts from the date of the LO which is not true.
Clawback clause is commonly found in all LO. When the loan is taken up with Bank A, Bank A will pay for your legal subsidy, valuation fee and fire insurance. These subsidies come with a 36 months clawback. Should you leave the bank within 36 months, Bank A will claw back those subsidies.
Generally for all LO, you will need to serve 3 months written notice to the bank should you decided to leave the bank. Else, there will be a 3 months in-lieu penalty impose by the bank. 3 months interest in-lieu is the potential interest the bank will earn for the next 3 months if you loan is still with them. I personally feel that it not make sense to pay and not to serve the notice. This clause will be important to client who wants to sell their house. Always negotiate with the new buyer that the transaction can only take place 3 months later as you need to serve a 3 months notice to your existing bank.
Repricing date (for Sibor/SOR package)
This clause is only found in home loan package that is pegged to Sibor or SOR. For home loan Singapore packages that is pegged to Sibor/SOR, usually there is only a specific date every month or every 3 months for client to leave the bank. If this part is overlooked, there will be additional penalty involved should you leave the bank.
Alan’s package with Bank A is pegged to Sibor and repricing date is on the 1st March, 1st June, 1st September and 1st December.
Alan decided to refinance to a fixed rate with Bank B on the 17th June. He needs to serve Bank A 3 months written notice before he can leave for Bank B. However, due to contract with Bank A, he can only leave on the repricing date – 1st March, 1st June, 1st September and 1st December.
Therefore, the refinancing could only be completed on 1st December (5 months and 2 weeks later) as he just missed the repricing date on the 1st September.
If the refinance is done on the 17th May instead of 17th June, he would be in time to serve 3 months written notice to Bank A and could leave for Bank B on the next repricing date – 1st September.