Most consumers want to know which housing loan is the best
in town. Unfortunately, that is the wrong question to ask.
There are more than 100 housing loan packages in the market
and what is best for one person might not necessarily be
the best for you. Each package has different features that
are suitable for different needs.
Thus, a more appropriate question to ask is what are the
factors that you should consider in choosing a housing
loan? Here are some things you should note before signing
on the dotted line for a home loan.
Pre-approval: Before you close a deal to buy a property, it
is advisable for you to first get pre-approved for a bank
loan.
With the setting up of the Credit Bureau in 2002, banks can
now check your repayment history of loans and credit cards
taken up with other banks. Were you late in paying
instalments? Have you ever been sued? If the answer is yes,
banks may not approve your loan application or they might
approve a lower loan quantum. This could jeopardise your
purchase of a property, and you might even have to forfeit
the option money you paid.
Loan duration: A minimum loan duration is five years and
the maximum 30 or 35 years, or till you are 65 or 70 years
old, whichever is lower.
One way to decide on loan duration is to time the loan
duration to match your intended retirement age. So, if you
plan to retire by age 60, you should ensure the loan is
fully paid up before you reach 60, rather than stretch it
till you're 65.
Floating or fixed: If you think interest rates have peaked
and are likely to go down, you might want a floating rather
than a fixed rate package.
However, if you're worried about the possibility of banks
revising interest rates upwards, you might want a package
which fixes the interest rate for the next one to three
years instead. It might not make sense to fix rates for
more than three years since the lock-in period for most
packages ends after three years. You can always shop around
for a better package after that.
Flexibility of repayments: If you intend to make a lump sum
repayment within the next one to three years, you should
look for a package that offers you the flexibility to make
such repayments without penalty. Some packages impose a
penalty fee of up to 1.5 per cent of any lump sum repayment
you make.
Transparency of rates: If you want to know the exact basis
for the interest rates charged on the housing loan, you can
consider loans pegged to interest rates that are publicly
available, such as the three-month Singapore Inter-bank
Offer rate (Sibor) or Swap Offer Rate (SOR) which move
according to market conditions.
Basically, a home buyer pays an agreed percentage above the
variable SOR for a specified period. You might want to
consider such a package if transparency is a key issue for
you and you are of the view that Sibor or SOR rates are
falling rather than rising.
Penalties: Ask if any penalty will be imposed if you make a
full redemption of your loan and how long the penalty
period is. Currently, there are some housing loan packages
with zero penalty period, while most loans typically have a
penalty period of one to three years.
Interest-only: If you are a high income earner and in high
tax bracket, choosing an interest-only mortgage might make
sense. You benefit through savings in income tax as the
interest portion of loan instalments for investment
properties is tax-deductible.
This package also works well for short-term investors. By
paying back only the interest, investors would benefit from
lower cash outflow until they sell the property. As a
result, they may be able to invest in two properties
instead of one.
Interest-offset: If you have substantial cash you might
want to consider an interest-offset mortgage instead. This
basically links your current account to your home loan. The
interest earned in your current account is the same rate as
that charged on your home loan. By offsetting the interest
earned on your current account against your home loan
interest, you can enjoy big savings - in time and money.
Every dollar you put into this current account would have
same effect as making a partial repayment of your loan, but
give you the added flexibility of drawing down the cash in
the current account if you need to. Whereas if you do a
lump sum prepayment, the cash is 'locked' in the property
and you lose liquidity. Thus, an interest offset package
enables you to pay a lower effective rate of interest on
your housing loan so that a bigger portion of your monthly
instalment goes toward reducing the principal. This allows
you to pay off your loan sooner and pay less in interest.
Promotions: Sometimes, banks might offer special
promotional packages. If you engage the services of a
mortgage broker, he would be able to provide you updated
information on such promotions which could translate to
additional interest savings for you.
Why better to apply loan through a Competent Mortgage
Broker? In the past, when consumers shopped for home loans,
they had to contact each bank individually to gather
information. This a tedious process that takes up a lot of
time. In the last few years, with the emergence of
independent mortgage brokers in Singapore, home loan
shopping and comparison have been made easier.
Basically, an independent mortgage broker who knows your
requirements can help you zoom in on the most attractive
home loan packages. You typically do not have to pay for
the service of a mortgage broker as banks pay them a fee as
they also help banks save on staff costs and resources.
In more advanced countries such as the US and Australia,
people usually apply for home loans through a mortgage
broker rather than go to the bank directly. In Singapore,
many people are still unaware of the services and benefits
of engaging a mortgage broker, but things are likely to
change with public education and increasing awareness.
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Dennis is a Certified Financial Planner and has 15 years of
bank lending experience. He founded
http://www.HousingLoanSG.com - a Leading Mortgage
Consultancy Portal in Singapore. He is known as a Housing
Loan Expert and is often quoted in newspapers for comments
on Housing Loans. Please send your comments to
dennis@housingloansg.com or call him at +65 6737 8801
