Home loan packages are hard to sell. Apart from the price, they all look the same and it’s important to know what to look for when comparing home loan rates. It doesn’t help that most bankers are numbers people, and have the imagination of a brick. But every so often, a bank’s product team comes up with an interesting idea. A way to give the package some value beyond “lowest interest rate”. In this article, I look at some special, locally available home loan features:
1. Combo SIBOR / SOR Package
Most home loan packages are based on either SIBOR (Singapore Inter-Bank Offer Rate), or SOR (Swap Offer Rate).
SIBOR tracks the rate at which local banks lend to one another. SOR is based on the foreign exchange rate (USD / SGD). For more details, see our earlier article.
The SOR rate is particularly volatile: When SOR moves up, home loan rates rise faster than hot air at the national conversation. When SOR drops, home loan rates hit rock bottom.
On the other hand, SIBOR whipsaws in slow, creeping motions. SIBOR gives little chance of a sudden drop in interest, but it won’t rise fast either.
This leaves borrowers with an either / or proposition: Either you’re risk averse, and crawl under the protective rock of SIBOR, or you play Mah-Jong with your finances and opt for SOR. But some banks, most recently ANZ, offer a combined SIBOR / SOR package.
The interest rate is determined by the average of both SIBOR and SOR. When SOR starts rising fast, the SIBOR rate restrains it, because you’re using the average of the two. On the other hand, if SOR rates plummet, it drags down the average of the two, causing you to pay less.
2. Benefits on Renovation Loans
Home loans don’t have much variation. It’s just borrowing money, and the concept’s been unchanged since Pharaoh had to finance his Pyramids (About the price of a resale flat in Bishan).
Some banks have given up on modifying the home loans, and use cross-selling: They can’t lower your home loan, but they can tweak other loans you might need. And if you’re buying a house, you probably need to pay for renovations right?
Some banks offer renovation loan bonuses when you take their home loan package. Most recently, Maybank gave out interest-free renovation loans (for one year) to their home loan clients. Some packages include lower interest on renovation loans, or lower interest for furnishing loans.
If you’re moving into your first home, and don’t have existing furniture, ask about renovation loan benefits. It may be the deciding factor when you’re choosing between two banks.
3. Partial Prepayment Options
When banks give you a loan, they generate profit by charging interest. The longer the loan tenure, the more interest the bank reaps. That’s why banks have issues with people who pay too early.
Many home loans have lock-in clauses, which prevent you from trying to pay off the home loan too soon. It’s called a pre-payment penalty, and it can carry a 1.5% penalty (on the amount being repaid). Borrowers have other names for it, which refer to one’s ancestry or sexual preferences, and should not be printed.
Pre-payment penalties don’t seem like a big deal, but can cost serious money in the long run. Interest eats into your capital gains (the risen value of your house when you re-sell it). And the longer you owe money, the more you’re subject to the threat of rising interest rates.
Some banks, most recently RHB and Standard Chartered, offer pre-payment flexibility. RHB’s package allowed borrowers to pre-pay up to 20% of their home loan without penalty. Features like these are useful if you have variable income (e.g. stock brokers, commodities traders, freelancers)
If you make unexpected money, you can use it to shave off interest rates and pay off your home loan faster.
4. Flexible Floating and Fixed Rate Options
Fixed rates mean your interest rate is “locked in”, they don’t change regardless of the current SIBOR or SOR. Floating rates are constantly adjusted to match the prevailing SIBOR or SOR rates.
As with point 1, this sets up another sadistic choice scenario. Pick a fixed rate, and you might end up “saving” yourself from outrageous profit (when rates drop). Pick a floating rate, and you’re intestines will break into an ulcerous mess every time the finance news comes on.
Some banks offer a compromise. Right now, only POSB / DBS (you can’t tell where one ends and the other begins) has such an offer. They have a 2+2 package, where you get fixed rates for two years, and then can choose a fixed or floating rate for the next two.
Currently, SIBOR and SOR rates are at a historic low. But with unpredictability in the global market, we don’t know how they’ll move in 2013 or 2014. The benefit of 2+2 is that it locks in the currently low rates; come the next two years, you can see where the market’s going and make a better informed decision.
5. Interest Rate Caps
This one’s straightforward: Some home loan packages limit the amount to which your interest rate can rise. A typical example is DBS Mortgage Rate Protector, which caps interest at 1.49%.
A common criticism is that rates will never go that high anyway. Yeah, famous last words. On a longer scale, the historic interest rate average in Singapore is about 4%. It’s only this low because America’s broke.
If the American housing market recovers (and it probably will), you can expect SIBOR and SOR to start the slow climb upward. When that happens, it may be time to look for an interest rate cap.
Finding These Features
Banks change their packages all the time. If you want updates, try checking the free loan comparison sites, like MoneySmart. Speak to the site’s mortgage broker if possible; banks can be obscure when it comes to features. You can also follow us on Facebook, and we’ll give you periodic updates.
What features do you look for in a home loan package? Comment and let us know!
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