Our home loans market has changed dramatically since 2011. We have new cooling measures, and new restrictions on bank practices. As such, applying for a loan may not be as simple as before. But with a bit of information and foresight, you can still save a lot of money. In this article, we look at three important tips for picking the right loan package in 2013:
The Home Loan Trend in 2013
The last round of cooling measure may be affecting the current home loans market. See the full article on those measures, or here’s a quick summary:
- Tighter loan quantums for second and third time buyers (as low as 20% – 30% financing in some cases)
- A maximum tenure of 35 years, even with refinancing activities
- Higher buyer stamp duties (up to 15%) based on residency status
While demand for property remains strong, there have been slight downward movements in price (an overall decline of 0.3%, as of January 2013).
In addition, home loan rates since Dec ’12 have shown an upward trend, despite factors like quantitative easing. Average SIBOR rates have moved from around 1.3% to 1.7%, as of January 2013.
From this, we speculate that because the cooling measures discourage anyone from having multiple housing loans, banks are experiencing or expecting a decline in volume (i.e. fewer people taking home loans). As such, banks may be compensating by raising interest rates in an attempt to keep their bottom line afloat.
But don’t worry; with a bit of foresight, you can still keep your home loan rates down:
1. Consider Fixed Rates
Fixed rate packages are starting to regain popularity.
Previously, these loan packages were not as favoured; they usually cost more than floating rates. However, buyers are now responding to the possibility of further rate hikes. By getting a fixed rate, which usually lasts three to five years, you could be paying the same rate in 2016 or 2018 that you are now.
This could mean significant savings in the long run. Besides, if you find the right bank, the extra cost of a fixed rate can be minimal (as little as 0.2% to 0.3%).
As an aside, fixed rates provide consistency in loan repayments. If you are using cash and not CPF, you will have an easier time knowing how much to set aside each month.
2. Don’t Be Distracted By Exotic Features
In the current loans market, “exotic” home loan features have been unimpressive. These are mostly attempts to compensate for higher interest rates.
Some typical examples, used to entice borrowers, are:
- Interest offset loans (use the interest on your existing bank account to reduce your home loan interest)
- Hybrid loans (based on the average of both SOR and SIBOR)
- Internal Board Rate (loan rates are determined by the bank in question, not by a publicly visible index like SIBOR)
We are not suggesting these features are always irrelevant. In some cases, they can be cost savers. However, many of them only benefit people in specific situations (e.g. Interest offset is only meaningful if you can maintain large sums in your bank account).
With interest rates heading north, it is not a good time to be distracted by circumstantial benefits. You would be better served by looking at hard numbers, and simply picking the lowest rate (extra features aside).
3. Look for Lock-In Packages
Lock-in packages prevent you from refinancing and making partial/full prepayments, for a set period (often three to five years). Do note that fixed rates automatically mean a lock-in, for as long as the fixed rate is maintained.
The disadvantages of lock-ins can seem discouraging. But practically speaking, most of the disadvantages may be irrelevant. As interest rates are heading up, there is less chance you will want to refinance in three to five years anyway.
Also, most owner-occupiers have little reason to make partial/full prepayment. The move is only typical of property investors, who want to quickly sell for profit after about five years.
So the disadvantages are not noticeable to the typical home buyer. On top of that, lock-in packages tend to cost less, as compensation for the restriction.
Where Do I Find the Cheapest Rates?
You can compare SIBOR rates on teletext. As for the full bank rates, you can use loan comparison sites like MoneySmart. The site’s mortgage specialists can also help with comparisons.
You can also follow us on Facebook, and we’ll update you regularly.
Have you got any concerns about home loan rates? Comment and let us know!
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