Home Loans

How Much Does a Mortgage Broker Save You?

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Ryan Ong

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In the last article, I explained how mortgage brokers beat bankers. Now I’ll back it up with some numbers. This time, we’ll examine the amount you save with the right loan package. If this doesn’t make you run out and compare prices, you must fail to understand the concept of money. So grab your calculator and spectacles; I also suggest you bring your own loan documents to compare.

 

Our Case Study

Our case study pertains to the average OCR (out of central region) condominium. This is the most popular type of private property right now.

Say our buyer, Mr. Hong, needs a loan to buy his condo. It’s $1.5 million, and he wants a loan of $1 million.

He doesn’t go to a broker, because: “Waste time lah. I don’t understand all this.” He accepts the first banker he comes across (probably recommended by the property agent).

The banker is from the Bank of China*, and this is the loan package he gets:

*Rates taken from June 2012. Home loan rates fluctuate monthly; these rates may not be the same by the time you’re reading this.

  • 1.23% interest, SIBOR-based rate
  • From the fourth year on, the interest rises to 1.48%
The breakdown is:

Year and Interest

Dollar Amount Paid (on $1 million SGD loan)

Year 1 – 1.23%

$12,144.00

Year 2 – 1.23%

$11.800.95

Year 3 – 1.23%

$11,453.65

Year 4 and on – 1.48%

$13,365.27

 

Mr. Hong shrugs and asks: “Is there a better deal you can give me?”

The banker replies: “Can pigs fly? If you are not happy you go and compare with other banks. By the time you are done, your house will be bought by someone else.”

(Not literal dialogue).

 

Flying pig
When will you bankers start valuing MY interests first?

 

So Mr. Hong scribbles his signature and agrees. A couple of weeks later, he’s surfing and comes across a home loan comparison site, like MoneySmart.

Just for fun, he inputs his loan to check the best rates. A minute later, a broker calls him and says: “Mr. Hong, your package is a worse deal than that time I invested in water-proof teabags. If you had come to me earlier, I would have found you this ANZ package.”

The ANZ package* is:

*As of June 2012

  • 1.12%, on a hybrid SIBOR / SOR package
  • Interest to remain consistent through to the fourth year
A quick comparison:

Year

Amount Paid, Bank of China

(1.23% for 3 years, 1.48% on 4th year)

Amount Paid, ANZ

(1.12%)

Dollar Amount Saved

(From using ANZ package)

Year 1

$12,144.00

$11,055.50

$1088.50

Year 2

$11,800.95

$10,737.96

$1062.99

Year 3

$11,453.65

$10,416.85

$1036.80

Year 4

$13,365.27

$10,092.13

$3273.14

Total Amount Over 4 Years

$48,763.87

$42,302.44

$6461.43

 

Total cost of finding out ANZ would be $6k cheaper: $0.00

Because mortgage brokers get the referral fee from the bank. They give you this information for free.

*Please note that Bank of China is NOT always more expensive than ANZ. As mentioned before, the rates of every bank change constantly. This is another reason why you want a broker to check.

 

Why Stop At Year 4?

Beyond year 4, most home owners will refinance. That means switching the loan from one bank to another, and paying the new rates.

You can see why: Bank of China’s rates, for example, jump from 1.24% to 1.48% on year 4. This is fairly common in loan packages, as the first three years are “teaser” years.

 

Calendar card
No, we’re not raising your rates because we hate you. We hate all our borrowers equally.

 

Again, it’s important to compare all the current loan packages when refinancing. As with a new loan, it costs nothing to have a broker direct you to the cheapest.

Mind you, refinancing may not be viable if you have a lock-in clause. You know what that is, right?

 

Brokers Warn You of Lock-Ins

If you are a first time home buyer, lock-in clauses may confuse you. Simply put, a lock-in clause is a limited duration clause, which imposes a penalty for refinancing.
The penalty varies from one bank to another. Some examples are being made to pay 1.5% of the loan amount, or 0.75% of the property value.
For example, say Mr. Hong’s package comes with a five year lock-in. As a penalty, he pays 1.5% of his loan amount. If he wants to escape on year 4, he would have to pay:
(1.5% x 1,000,000) = $15,000
Armlock
That’s not fair, I only understand one kind of lock. Let me show you.
This is a lump sum payment. It’s a complete waste of money, as it contributes nothing toward paying off the loan. For the most part, Mr. Hong’s best choice is to tolerate the bad rates.

To spot such lock-in clauses and understand their penalties, you can ask a banker, lawyer, or broker. The banker has less inclination to be honest. The lawyer would charge you money for breathing his air if he could. The broker will tell you for free.

 

Savings And Potential Savings

Mortgage brokers save you money by picking the cheapest loan. But don’t overlook the potential savings. Apart from pointing out lock-ins, brokers work closely with the banks.

They can ensure your documents are in order, so your loan application is fast and smooth. They know the bankers by name, and can bargain in ways you cannot. Brokers also know about the bankers’ quotas (if any), and are alert to ulterior motives (e.g. a banker might get more commission from selling certain packages).

By going through a broker, you are leveraging off their industry knowledge. Compared to going for a $1000 property course or consulting lawyers, the broker is the best deal. MoneySmart’s team of mortgage specialists will bring you through the entire home loan process, and best of all, you don’t have to pay a cent.

Image Credits:
kenteegardin, windygig, Joe Lanman, AKBAN,

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Ryan Ong

I was a freelance writer for over a decade, and covered topics from music to super-contagious foot diseases. I took this job because I believe financial news should be accessible and fun to read. Also, because the assignments don't involve shouting teenagers and debilitating plagues.