Let’s Go Home Loan Shopping

Source: The Sunday Times, 24 June 2007

The Great Singapore Sale frenzy is spilling over into banks as homebuyers scout for the best mortgage bargains. But with more than 100 packages on offer, it is no wonder the average Singaporean is left confused. Grace Ng wades into the mortgage muddle to compile this guide to help you find a loan that suits your needs.

1. Whither interest rates?

Your view on where rates are headed will determine whether you take a fixed-rate or floating-rate loan.

The three-month Singapore Interbank Offered Rate (Sibor), a benchmark rate that banks use in determining mortgage rates of home loans, is hovering at about 2.5743 per cent, having dropped steadily from 3.3763 per cent just six months ago.

OCBC’s head of consumer secured loans, Mr Gregory Chan, says Sibors still show ‘relatively high volatility’.

Indeed, the three-month Sibor has plummeted by almost 0.9 of a percentage point over the past 12 months, to as low as 2.3159 per cent on May 22. But since that date, it has climbed up by 0.2584 of a percentage point, leaving analysts and customers alike scratching their heads about where rates are headed.

Mr Chan noted: ‘It is too soon to predict housing loan rate trends although any upside appears limited at this point.’

If you think that rates have peaked and might even drop, you can opt for a floating-rate package because the rates tend to trend down with Sibor, said Mr Dennis Ng of consultancy www.HousingLoanSG.com.

But banks might delay adjusting rates downwards, so if you want certainty that your loan rates will keep in step with Sibor, pick a loan offered by the three Singapore banks or Standard Chartered Bank (Stanchart). These are tied to various Sibors, so you have a degree of certainty.

2. Are you ready to get a home loan?

Better check your credit history first to make sure you have a clean bill of financial health. And do a quick calculation of your debt servicing ability. This is the ratio of your total monthly financial commitments - such as car loans and unsecured credit - to your monthly income. The usual range accepted by banks is 40 per cent to 50 per cent.

Once you are satisfied you are credit-ready, get loan-ready: Seek in-principle loan approval from a bank for the property.

‘This will forestall any complications that may arise from a less-than-stellar credit history,’ said Mr Geoffrey Ying, the head of mortgage loans at financial adviser New Independent.

He also advised scouting around for a law firm that is on the panel of most of the major banks, so as to ease the conveyancing process.

3. How much to borrow?

Banks run credit checks and decide how much to lend.

Loan quantums of up to 80 per cent of the purchase price generally come with lower interest rates than those with a quantum of 81 per cent to 90 per cent. The rate difference is normally between 0.5 per cent and 1 per cent.

If you are buying an investment property and you are trying to lower your monthly mortgage repayments, you might consider an interest servicing package. This lets you service only the monthly repayment for the interest while the principal amount is maintained.

Mortgage brokers warn that the interest rate for this type of loan could be slightly higher than for conventional ones. You might also chalk up losses and hefty interest charges if the market turns south.

If you have a relatively significant level of cash reserves, you could also consider whether you should invest your reserves in potentially higher-yielding investments such as stocks, or keep the funds liquid in an interest-offset arrangement with the bank, added Mr Ying.

4. How soon are you likely to pay off your loan?

This depends on whether you are buying a property to live in or for investment.

If you are going to live in the home, then consider the loan tenure. ‘Typically, the longer the loan period, the more interest you end up paying. As a general guide, do not stretch the loan period to more than 25 years,’ said Mr Ng.

For example, a $300,000 loan at an interest rate of 4 per cent over 20 years requires monthly instalments of $1,818 and a total interest payment of $138,529. If the loan is stretched to 25 years, the monthly interest is $1,584, but the total interest paid is a hefty $177,771.

If you plan to sell your property in the short term, pick a housing loan with no lock-in period, or a shorter one of one or two years. Lock-in penalties can range from 0.75 per cent to 1.5 per cent, said Mr Wu Yihong of consultancy MyHappyHouse.com.sg.

Some packages might impose penalty charges on any partial repayment within the lock-in period. If you’re likely to make partial repayment in the next two years, choose a package that allows this without penalty fees.

If your property is still under construction, ask yourself how likely you are to sell it before the Temporary Occupancy Permit (TOP) is issued, or before the loan is fully disbursed, advised Mr Ng.

In the latter case, you should get a package with a lower cancellation fee. ‘This is especially important to speculators who typically sell the property within a short holding period,’ he added.

Also, you might want to opt for a free loan conversion. This allows you to convert your existing loan to a better one when the TOP is issued.

You can also choose the payment structure: deferred or progressive. Mr Ng noted that developers typically charge a higher price for deferred payment schemes: 1 per cent to 5 per cent higher.

5. How much volatility can you stomach?

This will help you to determine whether you want a stable rate - either a fixed rate or one pegged to the relatively stable Central Provident Funds (CPF) rate - or a floating one.

Arguably the most volatile rates are those pegged to Sibor, but they also offer the benefit of transparency, giving you assurance that your rates will move in tandem with benchmark rates.

Blended-rate packages might appeal to borrowers who have some appetite for risk and can accept slight fluctuations in interest rates in the hope of making smaller repayments, said Mr Ben Tan of mortgage consultancy Money Mind.

For packages with a higher proportion of years on a variable rate, the effective rate would be lower than for packages with a higher proportion on a fixed rate. There is more security with the latter, as a smaller proportion is exposed to the fluctuations of the market, Mr Tan added.

For loans linked to CPF rates, you can enjoy more predictability, but you might also want to weigh the hassle of getting the CPF Board to keep changing the CPF amount used for monthly instalments, warned Mr Ng. For housing loan packages that are pegged to a three-month swap rate, the instalment amount would have to be changed every three months.

So if you are using CPF monies to pay monthly instalments, you need to inform the CPF Board every three months to adjust the amount to be deducted from your account.