Finding Home Loan just for you Sunday Times 1 Oct 06

[Dennis Ng]

I'm often asked by the media including Sunday Times for comments on Housing Loans. The following is information I provided to Sunday Times which was published in their article entitled "Finding a Home Loan Just for you" on 1 Oct 2006

Cheers!

Dennis Ng, spokesman for Mortgage Consultancy portal http://www.HousingLoanSG.com

Is there such thing as a BEST Housing Loan Package suitable for all people?

One of the most common questions I?m being asked is ?Dennis, which is the best Housing Loan package in Sinapore?

The fact is there?re probably more than 100 different Housing Loan packages provided by all the financial institutions in Singapore at any one time, and each of these packages have their own different features that might be suitable for different needs and different situations. The fact is a Housing Loan package that is suitable or meet the needs of a person, might not be suitable or meet the needs of another person.

Thus, the key is to find a Housing Loan package that serves your specific needs and requirements, which is basically the value and the service of what www.HousingLoanSG.com a mortgage consultancy portal provides.

Today, we?ll look at several unique packages, that might be suitable for people with very different needs and requirements.

UOB First Zero.

This is a fixed rate for 3 years package that charges 0% in the first year. However, before a person gets too excited, the interest rate for 2nd year is 5.75% and for 3rd year is 6%.

There?re fixed rate for 3 years packages with lower overall interest rates for 3 years. Thus, for a person looking to lock-in interest rates for next 3 years, this might not be a suitable package.

However, some people actually find this attractive as they?re likely to sell their properties within 2 years. If a person fully redeem the loan within 2 years, he has to pay a penalty fee of 3%, or effectively paying a Fixed rate of 3% for year 1, which is not bad.

Thus, this package might be suitable for people who are going to sell their houses after 1 year or who want to consider refinance his loan after 1 year and get a fixed rate of 3% for year 1 after factoring the penalty fee.

Lloyds (interest only package for up to 30 years.

Most banks in Singapore only allow ?interest servicing? only for say, up to 1 year. However, Lloyds TSB in Singapore actually provides the choice of having an interest only package for up to 30 years!

Why consider such an ?interest only? package? The reason is only the interest portion of your monthly loan instalment is tax deductible. Thus, for someone who is at a high tax bracket of say, 20%, his rental income would be taxed at a high rate of 20%. Thus, by having an interest only loan, he can actually maximise his tax deduction in order to minimise his tax payable on rental income.

To ensure that he would set aside money every month for the lump sum repayment of the entire loan at the end of the loan period, of say, 30 years, this person can choose to set aside the money every month in a saving or investment vehicle eg. endowment plan or regular savings into a unit trust. Doing so, he can maximise his tax deductibility and at the same time avoid any possibility that he ?spends? the money meant to set aside every month for principal repayment.

This is suitable and attractive for property investors with a high income tax bracket.

However, this is not suitable for a person who is buying a property to stay. Because he would not enjoy any tax deduction from interest on such a loan.

Interest Offset Package
An interest offset package basically links your current account to your home loan. The interest earned in your current account is at 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 finish paying off your loan quicker.

Thereby, every dollar you put into this current account would actually have same effect of you making a partial repayment of your loan but give you the added flexibility of drawing down the cash in current account if you want to in future. Whereas if you do a lump sum prepayment, the cash is ?locked? in the property and you loses liquidity.

Thus, Interest offset package enable you to pay a lower effective rate of interest on your Housing Loan and thereby a bigger portion of your monthly instalment goes toward reducing the principal, thereby enabling you to pay off your Housing Loan sooner and paying less in interest.

This current account other than it pays you interest equivalent to your Housing Loan interest rate actually works just like any normal current account. You?re given a FREE cheque book (as a comparison, DBS charges 20 cents per cheque), you don?t need to maintain any minimum balance but every dollar you have in the account will earn you interest on a daily basis.

For whom is it suitable?

This is suitable for people who have lots of liquid cash. A rule of thumb is you can consider this package if you have cash that is equivalent to at least 20% of your loan amount.

The interest rate charged on interest offset package are slightly higher than a non-interest offset package. For instance, there?re floating rate packages that are 0.5% lower than interest offset packages. Thus, if you do not have much liquid cash, choosing an interest offset package might actually mean paying more interest than less.

Please note that the banks might change the way they pay interest on your current account linked to the Housing Loan in future and not necessarily continue to offer 1-to-1 offset.

Flexi-Currency Housing Loan

If you buy a property in Singapore, typically you can only borrow in S$. However, Lloyds TSB allows the flexibility for a person to have a ?currency switching facility? for your Housing Loan.

For instance, if you buy a property in Singapore but you have income overseas eg. denominated in US$ or pounds or AUD, NZD. You can decide to choose to switch between a S$ and US$ at least twice a year free.

For instance, if you have income in US$, you might decide to switch to a US$ Housing Loan and make loan repayment in US$. However, if interest rates in US rise, you can consider to switch back to S$ loan if you want.

This flexibility is especially suitable for people who might have income from overseas denominated in another currency and not S$. The advantage is you can ?switch back and forth? and not have to decide once and for all, whether you want a US$ loan or a S$ loan.