If you’re like 90% of the population, you don’t get home loans. You don’t get the differences between banks, the distinction between one and three month SIBOR, or why loan payments fluctuate like the borders on China’s maps. It’s meant to confuse you, and daze you into making mistakes. So take some hints from a former banker:
Mistake #1: Believe Bankers who say the Board Rate Won’t Change
Most home loans rates are pegged to two options:
1) The Swap Offer Rate (SOR), or
2) The Singapore Interbank Offered Rate (SIBOR)
However, a banker might sometimes offer you a third option: an Internal Board Rate (IBR), often just called a “board rate”. Using the IBR means your home loan interest rate will be determined by the bank.
And they can change it as they like, without you getting so much as a sympathetic nod and a “sorry”.
Now that’s crazy right? There must be three month old babies who aren’t naive enough to fall for it. Well, turns out, inexperienced home buyers can and do get fast-talked into it.
Our former banker (let’s just call him Big C) explains that:
“Some customers are misled by the bankers. Some bankers proclaim that their bank’s board rate has not changed for the past so-and-so years.
But while this may be true, in banks there are many different tranches of board rate, defined by date. On the system it looks something like ‘mortgage_rate_21042014’. But when the banker says the rate has not changed, he could be referring to another tranche ‘mortgage_rate_21032014’.
The banker usually explains it in vague terms, and always reassures the customer that the board rate mostly likely will not change in the future. But past performance does not indicate future results, and ultimately the bank can change the rate with just 30 days notice.
In the days prior to 2006, many banks changed their board rate as often as five to six times a year.”
Mistake #2: Believe Bankers Who Say You Can Easily Refinance
Most home loan packages come with a “teaser” rate. They are cheap for the first three years, and take a big leap in the fourth.
Most bankers will insist that isn’t a problem, because you can refinance (switch your loan package to another bank) on the fourth year. Bankers also use this to justify the risk of using board rates (see mistake #1): if it goes up, they’ll explain, you can always refinance.
“It is true you can refinance,” Big C says, “But if the overall interest environment has increased by then, the available loan packages might be higher than one you could secure now.
And refinancing to another bank would involve legal and valuation costs, that you have to pay again – around $2,500+. If your loan amount is not substantial by then, it also may not make economic sense to refinance – so you are effectively stuck with the package.
When it comes to dealing bankers, always do your homework before talking to them. Remember that they are there to make a sale.”
Big C suggests you pay attention to the “thereafter” rate of your home loan – that’s where packages with low teaser rates often hide the killer costs. You should also check for hidden penalties like interest review dates and breakage fees, which might hit you in the later years of the loan.
You can also contact a neutral mortgage specialist for free advice.
Mistake #3: Not Planning Out Ownership Issues to Avoid Future Costs
Big C says that “adding and removing” owners is something a lot of home buyers forget to plan:
“For example, say a brother and sister want to buy a HDB. If either one plans to get married within the next few years, taking a HDB loan might be better than taking a bank loan. The transfer of ownership is easier. With a bank loan, they have to go through the fractional purchase process*, which is tedious and costly.
Alternatively, let’s say a married couple are buying their first private property, with the intent of buying a second at some point. If possible, they might want the loan for the first property to be in the name of one spouse only.
This way if they buy a second property, they can avoid the Additional Buyers Stamp Duty (ABSD), or get a higher loan amount.”
*For more on the fractional purchase process, follow us on Facebook. We’ll cover it shortly.
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Tags: Home Loans