By Larry Haverkamp

INTEREST rates have never been lower.

So, is it a good time to refinance your home loan?

Here are the good and bad deals in home loans.

A bad deal

The old-fashioned fixed and variable rate mortgages are expensive, especially after the lock-in period of 2 or 3 years has ended. That's when banks raise rates substantially.

They often charge double what you paid in the early years of the loan.

There is no reason to keep those expensive loans since it is easy to convert them back to the low first-year rates.

But many borrowers are not aware of this option or don't know how to do it. This lack of knowledge works to their disadvantage.

Fixed and variable rate loans are typically tied to a 'board rate'. It is so complex that only banks fully understand it, yet it is what drives the high charges for these loans.

A good deal

Under pressure, banks introduced 'pegged home loans' about 3 years ago.

These are transparent, cheap and popular. It is a wonderful banking innovation.

The only problem is banks don't make as much money from these as the old fixed and variable rate mortgages. They don't encourage customers to convert them to low-cost pegged loans.

The pegged rates are tied to an interest rate you find in the newspaper. It is set by banking experts according to market conditions.

Our banks commonly use the 3-month Singapore inter-bank offer rate (Sibor) and the Swap offer rate (SOR). Banks set home loan rates equal to one of these base rates plus a mark-up.

To give an example, Mrs Money and I pay SOR plus 0.75 per cent for our home loan.

SOR is about 0.55 per cent now, which puts our home loan rate at about 1.3 per cent (0.55 + 0.75). The bank re-sets it every 3 months and the rate usually doesn't change much.

The lock-in period for the 0.75 per cent mark-up is 1 year. After that, our rate will jump to SOR plus 1.25 per cent. That's a 66 per cent increase in the mark-up, which is quite large. It changes our home loan from a great deal to a so-so one.

I told Mrs Money: 'Don't worry, honey. It is easy to cancel the increase.'

All it takes is a call to the bank 2 months before the rate rises. You say: 'Please re-price my home loan.'

The bank will ask you to sign a few documents and that's it. The loan will revert to the low first-year rates. It is the easiest way that I know to save a few thousand dollars in a couple of hours.

Buyer beware

Unfortunately, many people are unaware of the re-pricing option and banks don't go out of their way to tell them. I checked with each of the lenders and none informs customers when their lock-in period ends.

No bank says: 'We are pleased to report that you will save money by re-pricing your home loan now.'

Banks justify this in the name of 'buyer beware'. It means banks leave it to the customer to figure out they should re-price their home loan.

Is HDB still best?

MOST of us have an HDB loan and pay interest of 2.6 per cent per year. Should you give it up and move to a cheaper bank loan?

You can probably save up to 1 per cent per year by switching. On a $100,000 loan, it comes to $1,000 per year. Is it worth it?

It is tempting, but I think not. Here's why:

First, it is a one-way street. Once you move to a bank loan, you can't switch back to HDB.

Second, interest rates will go up again someday. When they do, the 2.6 per cent HDB rate won't jump as quickly. The present HDB rate hasn't budged for the past 10 years.

Third, HDB tends to be more flexible. If you hit hard times and have difficulty meeting your mortgage payments, HDB is more understanding.

Three types of home loans

HDB

Type of loan: (HDB loan rate)
Approximate interest rate: 2.6 per cent

Banks

Type of loan: (Pegged rates)
Approximate interest rate: 1.5 per cent

Banks

Type of loan: (Fixed and variable rates)
Approximate interest rate: 2 to 4 per cent

This article was first published in The New Paper.