Buying a home and taking out a mortgage loan is one of the biggest decisions a person makes in his entire life. With hundreds of thousands of dollars at stake (if not millions), a small mistake can sometimes ripple into an uncontainable damage to your life. First-time home buyers may face some difficulties understanding the intricate terms and conditions of home mortgage loans, but there are definitely ways for you to get a better deal out of it. It's about research and understanding how it works. Here's a look at 4 ways to help you get a better deal before you sign on for one of the biggest financial commitments you will have for the years ahead.
1. Always Compare Mortgage Loans
While comparing home mortgage loans may seem rather simple since you just have to compare the different interest rates, it's actually more difficult than people expect because interest rates are always changing. Most borrowers are focused on getting the lowest rate loan possible, but using this mentality can prove to be short-sighted.
For instance, floating rate loans usually provide a lower rate than a fixed rate loan. This is because fixed-rate loans come with a locked-in period that typically ranges from 2 to 3 years. During this lock-in period, a fixed-rate loan's interest rates do not change even if market interest rates are moving. This usually means that a fixed rate loan's the interest rates could jump rather significantly at the end of the lock-in period.
This is why you need to take into consideration a number of other factors as well when comparing different loan offers. Think about the interest-rate environment in the next few years and how it might affect your loan rates going forward. A couple important questions you must consider are whether you can take some volatility in your monthly repayments and whether you want the flexibility of refinancing easily.
Once you've chosen a mortgage loan, you might think that your job is now done. However, there's another step: refinancing your home loan can be a significantly economic way to save more money on your home loan, if done properly.
Refinancing means switching to a loan package with a different bank, while repricing (conversion) is when you switch to a different package within the same bank. Even if you can save 0.25-0.5% in interest rate, that could result in massive amount of annual savings since home loans can generally be in the hundreds of thousands of dollars. According to our research, most Singaporeans refinance their home loan every 3 years.
This means that you should look for home loans that don't have too many provisions preventing you from refinancing your loan flexibly. Moreover, after the first few years of your mortgage loan, interest rates are almost always revised upwards, which means you pay more interest if you simply do not bother to refinance. Some banks do offer a one-time free conversion with their mortgage loan when you first sign up, so remember to enquire about that.
3. Interest-Offset Accounts
An interest-offset account is a repayment account that is linked to your mortgage loan. The account works much like a savings account but allows the borrower to earn a high interest rate that matches her home loan. You can use the account like a savings account and draw on the funds anytime when you need them. Generally, such accounts will benefit those who have spare cash so that they can take advantage of the higher interest rates.
Let us illustrate how an interest-offset account works with Standard Chartered's MortgageOne SIBOR. Basically, this account matches 2/3 of the deposit in the account to the home loan rate, while the remaining 1/3 of the deposit will earn the bank's prevailing interest rate, which is currently at 0.25%. For a desposit of S$60,000, that can translate to S$1,050 of annual interest earned.
|Calculating how much you can save via an interest offset account|
|Home loan interest||2.5%|
|Annual Interest Offset|
|Total interest saved per year||$1,050|
Earning an extra $1,050 just from interest rates is actually a pretty good deal, considering that normal savings rate are at an average of 0.5% only. Just by putting the spare cash you have into an interest-offset account, you actually get to earn some sort of "cashback" that can offset what you are paying in mortgage interest expenses. In this case, this is about $87.50 per month, which can help you to save a a bit of money off your monthly repayments.
Do note that the terms and conditions for these types of accounts vary according to banks so do read up on the fine prints.
4. Select A Home Loan With Lower Rest
The term "rest" refers to the compounding period, or the frequency, in which the interest on an outstanding loan amount is calculated. All else being equal, the more frequently the loan is calculated, the lower the interest payments will be. This is because it will take into consideration a smaller outstanding loan amount as you pay down the loan over time. Most home loans in Singapore follow a monthly rest, while a few are on daily and annual rest basis.
You may think that the amount you save is small, but this can make a big difference if you decide to make pre-payments. For example, let's say you have an outstanding home loan of S$500,000 on 1 January. If you make an early repayment on 15 January, a loan with a daily rest will let you start paying interest only on the remaining S$400,000 immediately. However, a different loan with a monthly rest will still charge you interest on the initial S$500,000 you had on 1 January.
|Daily Rest Loan||Monthly Rest Loan|
|Outstanding home loan of S$500,000 on 1st Jan 2017||Interest on S$500,000||Interest on S$500,000|
|Partial Repayment of S$100,000 on 15 Jan 2017||Interest on S$400,000||Interest on S$500,000|
|Outstanding balance of S$400,000 on 1st Feb 2017||Interest on S$400,000||Interest on S$400,000|
The saving from reduced interest rate could be significant. If you were paying 2.5% in annual interest, that's savings of about S$100 in just half a month! If you do this a multiple times (a home loan lasts for 25-30 years), it could add up to a meaningful amount.
|Interest Paid for 15 days @ 2.5% annual rate|
|A loan of S$500,000||S$514|
|A loan of S$400,000||S$411|