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Re-pricing is the process of adjusting the interest rate stated in the original home loan contract with the current bank, thus effectively changing at least one of the key terms of the agreement.
While theoretically, re-pricing can refer to both an upward or downward adjustment to mortgage rates, it almost always refer to a downward adjustment.
This is because there would be no reason for a borrower to accept a re-pricing offer from the lender should it be an upward adjustment to existing interest rates which would be detrimental to the borrower’s finances.
Saying that, one might be receptive to a higher rate if the bank offers an additional term loan to the existing facility. If the borrower requires cash urgently, then taking on a higher rate for that extra funds might make sense to the borrower.
In an emergency situation for example, having cash on hand can be top priority against interest rates.
Re-pricing vs refinancing
There is sometimes a confusion between re-pricing and refinancing.
Refinancing refers to the complete replacement of the original loan with a new one, with possibly new terms which include changes in tenure or even the loan amount.
While refinancing usually refers to the taking of an existing housing loan to a new bank, the same lender of the original loan can also replace the current loan with a new one.
This is especially so when a regular home loan is replaced with a new home loan plus an equity loan.
This results in a new loan with new terms that would most likely incorporate new interest rates according to current market rates.
Repricing on the other hand is mostly just an acceptance of a new interest rate structure without any changes to tenure or loan amount.
The loan would be recast based on the new interest rate structure.
The borrower would continue to service the existing mortgage as per normal except that the interest costs, which affects the monthly payment, would be adjusted based on the new interest rate structure.
Some banks would charge a processing for of maybe $500 for the re-pricing, while others might waive such fees altogether.
In contrast, refinancing an existing loan facility to another bank would incur legal fees. The new lender might or might not provide rebates or subsidies for these closing costs items.
How to qualify for re-pricing
It must be noted that re-pricing is not a privilege.
It should also not be confused with a conversion clause which can appear very similar to homeowners.
When a request is made by a borrower for re-pricing, the bank would assess the case and make a decision of whether to:
- Refuse it outright
- Offer a lower rate to re-price the current loan to
- Offer new rates at current market rates
A big factor that affects their decision would be the borrower’s credit profile. An A-credit borrower would be in the best position.
If you have been regularly late with repayments, lenders would see such behavior in negative light. Why would they give you a better deal when you have not been a good boy?
It’s just like asking for credit card annual fee waivers. If a cardholder has been making late payments and/or still has an outstanding amount on the card, why would the bank have the annual fee waived?
The size of the loan can also be a major factor. An unhappy customer with a $2m loan is more valuable than one with a $200,000 loan. The numbers speak for themselves.
It’s worth bending backwards for clientele with high networth to prevent them from being acquired by competing lenders as customer. Losing them can mean losing other businesses the bank is doing with them too.
Then there is the value of the property. Some properties might have become undesirable to lenders and they might see a refusal to re-price as a subtle manner to nudge a borrower towards another bank via refinancing.
One of the common reasons for people to switch banks is for feeling unfairly treated by their current banks.
If a lender is offering better rates to new customers than to current ones, then it says a lot about the bank’s retention strategy and how much they value their existing client base.
There’s also the current market rates to consider.
If all types of home loan in the current market are not much better than a borrower’s current loan, then the borrower would have little options available for refinancing even if the bank refuses to re-price.
The borrower would be trapped with the existing loan as there are simply no better options in the market good enough to be attractive.
You can bet that if current market conditions are really this way, then the bank knows.
On top of that, changes in borrower’s personal income might make getting approval for refinancing with another lender impossible.
In such cases where a borrower has little to no options for refinancing, there is every chance that a lender would refuse re-pricing requests as they know that there is simply no alternatives available to the borrower.
If you are currently feeling victimized with high interest rates on the mortgage, maybe just a simple call to your lender is enough to get the loan re-priced.
You’ll never know until you try.
Finally, do realize that if your current loan is still within the lock-in period, there is no chance of getting re-pricing approved. So don’t waste your time.
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