For any first-time home owners, the world of home loans can be a scary and intimidating one. Not only do you have to grapple with the endless terminology and abbreviations like MSR and TDSR, there may be the fear of missing out on certain terms and conditions that can leave you in an unpleasant situation in the future.
With so much information to absorb and regulations to observe we have put together a simple guide for those who are new to home loans. Use these 4 factors to compare the various home loans offered in the market to help you decide which suits your needs best.
1. New Loan Or Refinancing Your Home Loan?
For those looking for a new home loan, the process is pretty straightforward. You will need to figure out the loan amount you need, as well as whether you can afford and are eligible for the loan.
Find out also how much money you need for your first HDB flat here.
Do keep in mind that the maximum Loan-To-Value (LTV) ratio in Singapore is 80% of the property price.
Moreover, you can only borrow up to 60% of your gross monthly income as a result of the Total Debt Servicing Ratio (TDSR) requirement.
If you are purchasing a HDB flat or Executive Condominium, the Mortgage Servicing Ratio (MSR) requirement limits you to using up to 30% of your monthly gross income to repay your mortgage.
If you are looking to refinance, you'll need to first check if your current loan is still locked-in with the bank. Most borrowers refinance their home loans in order to get a lower interest rate. Other than looking out for refinancing fees, you'll need to ensure you meet the eligibility criteria.
As a result of the current declining trend in property prices, your property valuations might have changed, thus altering the loan quantum you are eligible for.
To put it simply, even if you could refinance at a lower rate, you might be able to borrow less due to the lower price valuation of your property.
photo: Monetary Authority of Singapore
2. Types Of Rates
You can usually choose a home loan that's pegged to a fixed rate or a floating rate. Fixed rate loans consists of interest rates that stay the same during a fixed period of time. Floating rates, on the other hand, can change and are usually pegged to a type of benchmark rates – SIBOR or SOR.
Fixed rate loans allow you to better plan your finances because you'll know exactly how much you are going to pay each month. This gives you the stability to set aside a certain amount to service your monthly repayments. The downside is that fixed rate home loans are usually a little higher than floating rate loans. Fixed rate home loans can be fixed for a time period of between 1 to 5 years.
Floating rate loans usually start with lower initial rates compared to fixed rate loans, but they are considerably more volatile as they follow the benchmark rates. Those who choose floating rate loans are probably anticipating lower benchmark rates which will be in their favour.
If you've decided on a floating rate loan, you can then choose between a SIBOR, SOR or board rate loan.
3. Cost Of Borrowing
When it comes to home loans, most borrowers will focus on the interest rates rendered on their loan.
You might be looking at the lowest initial rate possible as you have the intention to refinance sometime later, but you'll never know if market conditions may change then which means that you may be stuck with a home loan with a higher interest rate after the lock-in period.
Hence, it is perhaps wiser to look at the cumulative interest payments between your home loan options.
4. Loan Conditions
Once you've settled the first three points, you might want to look at the conditions governing your loan. These conditions are important in the long run and can work to your advantage or disadvantage in a few years' time.
You might want to be able to make a partial or full repayment a few years down the road. Some banks impose a penalty for this as it essentially limits the potential interest payments they will receive from your home loan. The penalty can be substantial, up to about 1.5% of the redeemed amount.
If you are quite sure that you'll take up the option of refinancing or repricing in the years to come, ask the loan-issuing bank if there are any free conversions when that happens.
In order to attract borrowers, it is not uncommon for banks to offer some "goodies" to clients. As we know, most things do not come for free. Should you decide to refinance or reprice your loan, banks can issue a claw-back on these privileges that have been rendered to you. These can be in terms of free fire insurance, legal subsidies or cash rebates.
- Repayment Penalties
- Refinancing Charges
With these 4 points in mind, you should be able to make a sound comparison of home loans.
This story was first published on Get.com.