Since the subprime mortgage crisis in 2007, banks have been particularly careful not to give misleading information on home loans. This doesn't mean that home loan bankers will share the full facts though. In fact, the more conscientious the banker, the harder it may be for them to share these points with you.
Which Years' Home Loan Interest Rates are Most Important?
I know we want the lowest rates every single year but this is unfortunately a pipe dream. Home loan rates can be flat throughout the loan tenure but they are not as low as the lowest rates of a step up or step down home loan package.
So which years' rates are more important? There are a number of factors that determine this. For simplicity, here's a rule of thumb.
- If your home loan is more than 400K and this is a new mortgage you are taking up (i.e. not refinancing), the 1st 2 years rates are the most important.
- If your home loan is more than 400K and you are refinancing, pay extra care to the 1st 3 years' interest rates.
- If your home loan is 400K or less, every year's interest rate is significant.
Past Rate Movements are No Indication of Future Movements
Different bankers tell you different things about past interest rate trends depending on their banks' home loan offerings.
If a bank launches a relatively new fixed deposit pegged or board rate mortgage, the banker can obviously state with conviction "Our rates have never moved. It's more stable compared to other banks' floating rate housing loans."
Perhaps the bank is good at fixed rates. The mortgage banker will go "You see rates have gone up by 1% since a year back. Do you really want to take the risk of going for floating rates?"
And when SIBOR packages were first introduced many years back, one will tend to hear "It's better to go for SIBOR than board rates as SIBOR is much more transparent."
Mortgage bankers cherry pick historical data to persuade you that their rates are better. But at the end of the day, this is a distraction from the key question at hand: is the home loan interest rate going up or down?
Home loan rates are not determined by the laws of nature or market forces. The past will not determine the future.
Legal Fees & Cash Reward Clawback
The legal subsidy or cash reward that a mortgage lender provides has always come with a clawback period. This period is commonly 3 years. Basically these "freebies" will have to be returned if you leave the bank within this time frame. You know like how an ex asks for gifts to be given back because they feel that the bond has been broken.
What this means is that you may not be able to refinance without repercussions even if you are out of your lock-in period.
Banker Cannot Help You to Reprice
You may have chosen to go with a bank because the banker is super nice and helpful. Nothing like having a good banker you can depend on since your relationship with the bank will be for a few years at least. Your banker may be sterling but even then he or she cannot help you to switch packages easily when the time comes. What they can do is to pass the message on to their respective departments that will contact you on new packages they can offer. Or maybe they will direct you to the respective bank's hotline. It is not their fault. Banks have commercial reasons for such procedures. We'll touch on that next.
Look into Refinancing Early
By offering you a lower rate, the bank is earning less so it's a bit like shooting themselves in the foot if they proactively reach out to you to reprice. Hence the bank tends not to remind you to refinance. And you may even have to remind them about your repricing query.
Many folks do remember to contact their mortgage lenders around the end of their lock-in period. But not many do so 4 to 6 months beforehand. Some people fear that if they begin the refinancing process within the lock-in period, they will have to pay some kind of penalty. Others are simply unaware that 3 months notice is required to be given to a bank when refinancing. Or when you contacted your mortgage lender, they communicated that your loan can only be repriced a few months before your lock-in period is up. You naturally thought that will also be the case if you switch banks.
Even if you are aware of all the above, it's tempting to not do anything. We may have hopes that a good package will be offered when the time comes. That sadly didn't happen for me. Now I think it's prudent to heed the proverb "A bird in the hand is worth two in the bush".
If you want to support your bank, buy one of their products that make you money, not stick to one that costs you money. Do look into refinancing early.