5 Things to Know About When Choosing Your Mortgage

In spite of what it might seem for new buyers, loaning money from the bank to pay for a mortgage isn’t as simple as just borrowing from them like they are your best friend. Instead, there are quite a few factors to consider, and I’m here to advise you on the 5 Things to Know about when choosing your Mortgage.

Loan Amount

Normally, the local banks will only give a loan of up to 75% for first-time home buyers, but the actual amount might be lower if they have determined that your circumstances disqualify for the maximum loan. What do they typically look at is a debt servicing ratio of 30-60% as a ceiling.

To calculate this “ratio”, they sum up all your debt payments (instalment fees for that UHD Smart TV you just had to buy, credit card bills for that holiday, and also your potential mortgage and car payment) and divide that by the amount of salary you draw every month.

And remember, when I say 75%, that only means 75% of the LOWER estimate of your property purchase price or the banks’ internal valuation, whichever is lower. If your purchase should exceed that valuation, you will have to make up for the difference in cash.

Loan Term

In other words, how long will you take to pay them back? Usually, banks will give you 10 to 30 years to repay the money. Much like those tempting little instalments, the longer the term period, the less you have to pay each month… but also, the bigger the total amount of interest.

Your age is also an important factor in determining not only how long you get to pay for it, but also how much the bank will lend you.

Once you above 35, it means you will have less than 30 years of loan tenure, then not only are you forced to pay up in the number of years before you hit 65 (i.e. 15 years if you’re currently 50), the instalments will also be heftier as well.

Fixed or Floating Rate

Residential mortgage loans in Singapore basically fall into two categories: Fixed or Floating. Which one should you go with? It all depends on what your call on the direction of interest rates.

When the economy is doing well and inflation is rising, generally we can expect interest rates will also rise as well. Thus, in such situations, you might want to take advantage of fixed-rate packages from the banks. This way, you lock in the rates for x number of years and you will be protected from a sharp increase in your monthly payments.

Another benefit of going with fixed-rate packages is the certainty you will have with your monthly instalments, regardless of how the interest rate fluctuates, your payment amount remains the same. Do take note though, there are some packages that are marketed as fixed rates but aren’t really so.

However, should the economy falter, the central banks tend to ease monetary policy and would then result in lower interest rates. In such an environment, you would do well to go for the floating package as your payments will shrink with the lowering of interest rates.

One downside to floating packages is the uncertainty of your monthly payments. If you are one to not have the inclination nor the time to monitor the deductions and your bank balance, then this might not be the package for you.

 For greater transparency of how your mortgage rates fluctuate, go with packages that tack their rates against major benchmarks like Singapore Interbank Offered Rate (SIBOR) or the less common Swap Offer Rate (SOR).

These rates are mainly influenced by the US Federal Reserve Fed Funds Rate and the Singapore banking system liquidity.

Other Special Features

Some loans have an interest offset feature, where deposits at the bank can be used to offset the loan amount so you only pay the interest on the difference. If you have large amounts of cash that you wish to save up for other purposes (like investing in the stock market), this could be a viable option.

Some banks also allow you to pay for interests only… but on a case-by-case basis. What this means, however, is not that you only need to pay the interests indefinitely –

 The banks aren’t charities! No, instead, it merely means that you only need to pay the interests for a certain amount of time until for whatever reasons that you have for minimizing cash spending. Then after that period is over, you’ll have to pay back the loan plus the interests like a normal repayment.

Subsidies, Lock-in Period and Penalties

Previously, loans come with some subsidies including the legal, valuation and fire insurance fees, however, at the time of this writing the banks are no longer allowed to give out those subsidies.

The lock‐in period (the period of time that must pass before you are allowed to redeem your loan) you should choose depends on your expectation of when you will sell the property or refinance to another bank. Your view of where interest rates are heading should also factor in this decision.

 Typically the shorter the lock‐in period, the higher the interest rate you’ll have to pay. But if you repay the entire mortgage within the lock‐in period, you typically have to pay a penalty of anywhere from 0.75% to 1.5%, which is a lot of money, so consider this carefully.

Some banks can waive the penalty if you are selling your house (as opposed to just repaying the mortgage), so make sure you check if they will include this special benefit.

A special tip to keep note – sometimes the bank can give you additional discounts off their advertised interest rates, especially if you have been a loyal longstanding customer with a good credit score.

 Just ask! I’ve known people who have gotten 0.05 discount – that adds up to some serious money when you are talking about hundreds of thousands of dollars.

These are 5 Things to Know about when choosing your Mortgage.

If you are feeling overwhelmed by all these different options, or want an unbiased breakdown of the pros and cons, feel free to contact me, your trusted advisor, to help you filter the right packages for you based on your requirements. Happy shopping!

HDB loan versus Bank loan

Pros for HDB loan

• Less downpayment. HDB can loan up to 90%, hence you will only need to come up with a 10% downpayment. And it can almost entirely be funded from your CPF.
• No prepayment penalty or restriction. You can pay a lump sum or increase your monthly payment to quickly pay down the loan and reduce the sum you pay toward interest.
• Interest rates have been very stable (in fact, stayed the same) over the last two decades

Cons for HDB loan

• The interest rate is 2.6% which is much higher than what you can get from the banks.
• Loan tenure is only a maximum of 25 years.

Pros for a bank loan

• The interest rate is much lower. At times half that of what HDB charges.
• Able to stretch loan tenure, and hence lower the monthly payment, to 30 years.

Cons for a bank loan

• Very little flexibility to repay lump sums to reduce the loan.
• Banks are less forgiving when payments are late or in arrears.

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