Guide To Getting A Home Loan

Source : The Sunday Times, Nov 18, 2007

It's easy to get carried away by swish showflats and glossy brochures but when it comes to the nitty-gritty of financing that dream home or money-spinning condo, it's best to keep your feet on the ground.

Let's take a walk through the top seven questions that you should consider when shopping for a mortgage.

1. How much can I borrow?

This is the first question you need to ask before you sign the purchase contract for that ideal flat with the pool view and auspicious unit number.

There are essentially two factors that banks consider when determining how big a loan they can grant you.

First, they are allowed to lend you no more than 90 per cent of the property's purchase price or valuation - whichever is lower.

So if the valuation is less than the purchase price, be prepared to cough up more cash to meet the difference.

Take note also that interest rates are usually higher, between 0.5 and 1 percentage point, for loans larger than 80 per cent of the property's value.

Next, banks will also want to make sure you can afford the monthly instalments of the mortgage.

The rule of thumb is that all your monthly financial commitments, such as car loans, should not exceed half your monthly income.

Online loan calculators found on bank websites can help you estimate the monthly repayments of the potential mortgage you are considering.

Alternatively, just walk into your favourite bank branch and get advice from the officers there.

Some banks, such as Standard Chartered Bank (Stanchart), do offer "in-principle approvals" for existing customers. While a final go-ahead is still needed, it does give an indication of how much you can borrow.

2. Where should I start shopping?

The most obvious way to find out about interest rates and loan packages is to visit the various banks.

The Internet and the phone may help with some initial inquiries, but a face-to-face consultation is often still needed to get details and the latest information.

If DIY is not your thing, you can seek advice from mortgage brokers who will do all the legwork for you - for free.

"What we offer is a "one-stop shop" where we hope to help clients weigh up the various packages objectively," says Mr Geoffrey Ying, mortgage division head of financial advisory New Independent.

Beyond finding out the rates and terms of various loan packages on the market, they can sometimes even offer you special packages with lower rates.

3. How long should I stretch the mortgage?

A longer tenure will mean smaller monthly instalments. So to minimise the immediate pain, most borrowers tend to stretch their loans for as long as possible.

Most banks typically assume borrowers will be able to keep up with monthly repayments up to age 70. Hence, a 35-year-old can get a 35-year loan.

But a protracted loan may not always be a good idea, as you will end up paying a lot more interest.

Take, for example, a $500,000 mortgage with an average annual interest rate of 4 per cent.

A 30-year loan translates into monthly repayments of $2,387 and accumulated interest of $359,288.

If you can stump up $642 more each month, you can finish paying up the loan 10 years earlier and save $132,162 in interest charges.

4. How do I want my interest rates determined?

Standard mortgages are charged according to reference rates set by banks, which they may change over the tenure of the loan.

While based loosely on benchmark interbank rates, each bank's reference rate is different and may be affected by a bank's business and its funding costs.

Recently, loans with rates pegged directly to benchmark rates such as the Singapore interbank offered rate, or Sibor, have hit the market for borrowers who want greater transparency about how their interest rates are determined.

These mortgages tend to be slightly more expensive than plain-vanilla variable rate loans and will usually expose borrowers to market fluctuations fully.

For transparency with stability, POSB's Ideal Home package may appeal to many as its rates are pegged to the Central Provident Fund Ordinary Account rate, which has not changed in the past eight years.

5. Should I opt for fixed rates?

For peace of mind, rates can be fixed, usually for the first one to three years.

Mr Bryan Ong, a senior associate manager at real estate firm PropNex, recommends fixed rates to busy people who could well do with one less thing in life to monitor.

Moreover, locking in a low interest rate may well be financially prudent if rates are expected to go up. Stanchart mortgages head Elaine Heng says borrowers who chose fixed rate loans in 2005 have been enjoying big savings. Rates were as low as 1 per cent two years back but have since risen, going above 3 per cent in June.

But hindsight is always 20/20.

Also, fixed-rate loans are charged at a small premium over flexible rate loans. This means any potential savings is likely to kick in only after the first three to six months, says OCBC Bank consumer secured lending head Gregory Chan.

"Fixing rates for one year doesn't make sense unless you think rates are going to spike up."

He added that keen competition is keeping rates low anyway.

For those who want to hedge their bets, most banks offer "combo" or "hybrid" loans where a part of the mortgage has its rate fixed, while the remainder is kept variable.

6. What about lock-in periods, early repayment penalties?

Banks typically stipulate that borrowers cannot accelerate their loan repayments in the first one to three years.

Any early redemption often carries penalties equivalent to between 1 per cent and 1.5 per cent of the principal.

Each bank has its own rules and, even then, these differ between products, and special promotional exemptions are available from time to time.

In general, fixed-rate loans usually come with a lock-in period because the lender would have already incurred hedging costs.

Flexibility can, however, be bought by paying 0.5 per cent to 0.75 per cent more interest, says DBS home loans head Koh Kar Siong.

But what is almost unavoidable when redeeming a loan early is the return of legal and insurance subsidies that the bank may have given initially. Mr Koh says this question is more pertinent for speculators who hope to flip their properties for a quick buck.

Still, longer-term buyers may want more flexibility to refinance their homes to take advantage of better mortgage deals that may come up.

And then, there's always the possibility - however remote - of striking lottery.

7. What else is in the market?

There are a few innovations in the mortgage market that may benefit those with some extra cash in their hands.

Products such as Stanchart's MortgageOne and HSBC's SmartMortgage pay borrowers the same interest rate on some of their deposits as their loans.

This effectively means that the higher interest earned from deposits can help offset some of the borrower's mortgage costs.

Another product that tries to help borrowers pay off their loans more quickly is OCBC's QuickOwn mortgage.

Instead of giving a special rate for deposits, borrowers need to set aside regular savings over 12 years that will go into an endowment policy.

Payouts from the savings plan will go towards paying off the mortgage, reducing the loan's tenure.