Useful Tips on Home Loan Shopping - Sunday Times 24 Jun 07

[Dennis Ng]

Welcome to the 21st Issue of Weekly e-newsletter by www.HousingLoanSG.com This issue’s topic “Useful Tips on Home Loan Shopping”, which contain my comments quoted in Sunday Times page 21 article: “Let’s go home loan shopping” on 24 Jun 2007.

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Dennis Ng, http://www.HousingLoanSG.com – help you get BEST Deal in Housing Loans in Singapore & Australia!

Useful Tips on Home Loan Shopping

What is the penalty period of the loan package? For instance if you’re likely to sell this property within the next 2 years, you might want to choose a Housing Loan package with a short lock-in period of say 1 year or no lock-in period at all.

What is the chance of selling the property before TOP or before loan is fully disbursed? If you might sell off the property before the loan is fully disbursed, you might want to look for a Housing Loan package with a lower cancellation fee. Low cancellation fee is especially important to property speculators who typically sell the property within a short holding period.

What is your view on Interest Rate trend in the next 2 years?

If you’re of the view that interest rates have peaked and unlikely to go up in the next 2 years and might even drop, you might want to choose a Floating Rate Housing Loan package rather than a Fixed Rate Housing Loan package. You might also choose a package tied to Swap Offer rate or Inter-bank Offer Rate whereby any drop in interest rates would be translated into lower interest rates on your Housing Loan. Because sometimes even when inter-bank offer rates drop, bank might not adjust the interest rates on their Housing Loan downwards.

Any flexibility on partial repayment?

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 2 years, you might want to choose a package that allows partial repayment without penalty fee.

Details about home loan shopping:
- what is the best duration of home loan to get?

Typically, the longer the loan period, the more interest you end up paying. As a general guide, do not stretch loan period to more than 25 years. For loan period that stretches beyond 25 years, say 35 years you would end up paying much more interest compared to a loan of 25 years.

As an example, using S$300,000 loan amount assuming average interest rate of 4% on the Housing Loan as example:

Below example shows if loan period is 20 years, monthly instalment is S$1,817.94, while if loan period is stretched to 25 years, monthly instalment is reduced by $234.43 to $1,583.51, and total interest paid increased by about $42,240.93. However, when loan period is stretched a further 10 years to 35 years, loan instalment is only reduced by S$255.19 only, while total interest paid increased by $75,600.27.

Loan Period
20
25
30
35

Monthly instalment
$1,817.94
$1,583.51
$1,432.25
$1,328.32

Total interest over loan period
$138,529.77
$177,770.70
$218,895.28
$253,370.97

Another way is not to stretch loan period beyond your retirement age. For instance, if you plan to retire at age 60, you should not be taking a loan period that stretches till you’re age 65 or 70.

- what is free loan conversion and should I take deferred or progressive payment schemes if my property is still under construction?

Free loan conversion is a feature whereby a bank allows you the borrower to convert your existing loan package to a better package upon TOP of the property, this is especially useful and important if you’re buying a property which is still under construction and the TOP is 2 to 3 years in future. Having this feature assures you that you will not be tied down to your existing loan package should there be a better package upon TOP of the property.

Property developers typically charges a higher price for deferred payment scheme, the price difference can be 1% to 5% higher than that offered for Progressive Payment, consumers need to decide for themselves whether having deferred payment is really necessary or worth the higher price.

What is the difference in interest rates for mortgages for property under construction vs completed property?

Currently, there is not much difference in interest rates for Housing Loans whether for completed property vs construction. In fact, some banks offer the same packages whether for completed or properties under construction.

- what are the refinancing penalities and costs, and under what circumstances should a borrower consider refinancing?

If a person is out of the lock-in period, the only cost of refinancing is only possibly legal cost of refinancing. Banks provide legal subsidy, thus depending on the outstanding loan amount, the full legal cost of refinancing might be fully subsidized by bank and thus cost of refinancing can be zero!

If a person is still within the lock-in period, we will help consumer to calculate whether the interest savings by refinancing into another Housing Loan package which offers lower interest rates is more than enough to offset cost of refinancing, which might include repayment penalty and refund of legal subsidy.

- Comments on transparency of Housing Loan packages?

Consumers should note that transparency might not mean lower interest rates, but higher interest rates instead. For instance, when inter-bank offer rate was still hovering at about 3%, there was a bank charging only 2.78% interest rate on Housing Loan, even lower than inter-bank offer rate. If one insists on transparency, it would typically mean there is no possibility of paying interest rate lower than inter-bank offer rate, since all packages pegged to inter-bank offered rate typically charge an additional interest margin over the inter-bank offered rate.