Rank

Bank

HDB (%)

Private (%)

1,1

HDB

2.60

N/A

2,2

Maybank

3.23

3.23

2,2

HSBC

3.40

3.40

2,2

Current Linked Accounts

3.45

3.45

2,2

DBS

3.57

3.57

2,2

OCBC

3.57

3.57

2,2

UOB

3.57

3.57

2,2

Hong Leong

3.54

4.08

-,2

NTUC Income

N/A

3.70

3,3

Citibank

3.90

4.15

3,3

St. Chartered

3.95

3.95

4,4

ABN-Amro

4.57

4.57

Best refinancing strategy

(i) Most banks charge an early repayment penalty of 1.5 per cent for repayment of the loan within the penalty period, which is 2 years for variable-rate loans and 3 years for fixed-rate loans.  There is also a 0.4 per cent legal subsidy clawback for loan repayment within the first 3 years. 

(ii) Two refinancing strategies work well. The first is to wait until the end of year 2 then switch to another bank.  That way, you will avoid the 1.5 per cent penalty.  You must, however, pay the 0.4 per cent legal subsidy clawback. The  ave. rates shown in the table are calculated as follows: ((Interest rates in years 1 + 2 + the legal subsidy clawback)/2). 

(iii) The second strategy which works even better is to refinance at the same bank.  It is often called "converting" your home loan instead of "refinancing" it.  At the end of year 2, your rates are set to rise again in year 3.  Then, it is best to go to your bank and say, "I do not wish to pay your year 3 interest rates.  I prefer to go back to paying year 1 rates so I would like to refinance my home loan."  Surprisingly, the bank will not oppose this even though it means they must charge you less. (They know if they do not agree, you will take your business to another bank.) 

(iv) The cost of refinancing at the same bank is usually $500 but a few banks charge $800. It is called "a conversion" or "re-pricing" fee.  It is "negotiable" which means with a little effort, you may be able to get your bank to waive it.  Also, you should not pay the legal subsidy clawback of 0.4 per cent. Since you are staying with the same bank, there is no justification for the bank to charge it. (If you move to another bank, however, you may be required to pay a new set of legal fees but ask the bank.  Many banks will waive it to get your business.)  

(v) For a $200,000 loan, an $800 conversion fee is exactly 0.4 per cent. For larger loans, the $800 is slightly less than 0.4 per cent.  For smaller loans, it is slightly more.

(vi) The table above shows the average interest rate for 2 years plus 0.4 per cent -- (which is the legal subsidy clawback or the conversion fee, both which come to about 0.4 per cent). 

The formula is (the interest rates for year 1 + year 2 + 0.4) / 2.  Using UOB HDB loan as an example, the figures are (3.25 + 3.50 + 0.4)/2 = 3.57 per cent. For HSBC, it uses the 1-year lock-in rate of 3.4 for both years 1 and 2. For Maybank, the clawback is 0.5 instead of 0.4 per cent.

Refinancing does not appear to result in huge savings. But it is worth it since the refinancing rates are lower than the alternative of paying the year-3 interest rates.  On average, the savings is about 0.3 per cent.  It means the savings is $750 per year for each $250K borrowed. For a $500K loan, the savings would be $1,500 per year. 

Keep in mind that the year-3 interest rates are not what you really pay and are likely to be higher -- in which case your savings would be more than 0.3 per cent per year. 

Refinancing with CLA produces savings IF one has the cash to take advantage of this scheme. The rates shown for the "current linked account" (CLA) are for Citibank. Citibank calls it a "Home Saver" account. CLA produces savings IF one has the cash to take advantage of this scheme. Citibank's private property CLA package has the lowest rates. (i) It is also the only bank which offers CLA for HDB flats, (ii) it has the lowest loan size requirement ($100K), (iii) it can be used for fixed and variable rate loans and (iv) it is part of Citibank's standard loan package so it does not incur additional charges.  Rates from a CLA are about 3.5 per cent vs. about 3.2 per cent for a money market fund.  So the savings from CLA are not great -- 0.3 per cent in this example. (See details.) 

HDB's rates are cheapest

HDB's 2.6 per cent concessionary rate loans are cheaper than any bank rates. They also have these 4 advantages:

a. HDB is considered to be more helpful should you hit on hard times and default on your home loan.  

b. HDB adjusts interest rates slowly, which is especially helpful when rates are rising.

c. HDB loans give flexibility. It is easy to take an HDB loan then switch to a bank loan.  But you cannot take a bank loan and later refinance it with an HDB concessionary rate loan. 

d. CPF rules require that bank borrowers pay 5 per cent of an HDB flat’s purchase price in cash.  HDB loans do not have this cash requirement.