Hi there, home loan delivery. Here’s your mortgage package, with an extra serving of unnecessary difficulty. What’s that? You didn’t order extras? Well tough; eat it or stay homeless dude. A new MAS ruling is removing home loan subsidies, and now, you’ll need more cash-on-hand to buy property. The banks are already adapting to it; so if you’re looking to get a loan or refinance, you’d better get with the program:
What Is The New Ruling?
The new ruling stops banks from giving out certain freebies. Chief amongst these are legal subsidies, valuation fees, and fire insurance.
Previously, most banks would typically subsidise 0.4% of the legal fees, to a maximum of $2,500 for private properties ($1,500 for HDB flats). You would only have to pay this back if you refinanced within a three year clawback period. First year fire insurance was usually free. Likewise, the valuation fee of about $500 was usually paid for by the bank.
The new ruling influences your home loan in three ways:
- You need additional cash in hand
- Refinancing is more difficult
- Removes clawback concerns
1. You Need Additional Cash in Hand
With the lack of subsidies, here are the things you need to pay for:
- Legal Fees – Around $1,800 for HDB, or $2,500 – $3,000 for Private Property
- Valuation – Around $500
- Fire Insurance – Around $100 – $300 per year
The total costs for HDB units is about $2,400. For private property, the cost is about $3,500. Again, you will need this amount in cash, so be ready when you get a loan.
Note: You can actually use your CPF funds to cover legal costs but we would advise against taking out good money that is otherwise earning you good interest…unless you absolutely have to.
Some banks have special schemes, which work the fees into the loan amount; this could save you having to pay the fees. These schemes usually subtract the total value of the bank’s “freebies” from the purchase price, to derive a “nett purchase price”.
The 80% (or 60%) loan-to-value is taken from this nett purchase price.
Simply put, you end up borrowing a little less from the bank, and paying a little more as part of the down payment. If you’re interested, compare the loan packages and speak to mortgage brokers. Loan comparison sites like MoneySmart can find these banks for you.
2. Refinancing is More Difficult
Previously, refinancing was straightforward. When you spotted a bank with a cheaper package, you jumped ship. At most, you’d incur some processing fees.
But with subsidies removed, the cost for switching banks is steeper. Refinancing private property, for example, can cost around $3,500 in fees (see point 1).
The situation is worse with clawback. In the past, some borrowers were happy to refinance despite clawback penalties. Even if they had to repay subsidies (again, let’s say $3,500), they’d recover the cost in a few months.
But now, someone breaking the clawback needs to pay the twice that amount. If I go from Bank A to Bank B, for example, I need to repay $3,500 for Bank A’s subsidies. After that, I’ll be forking out another $3,500, because Bank B isn’t subsidising the new legal fees or valuation.
In total, that’s $7,000 to refinance if you break the clawback.
Repricing Instead of Refinancing
The new ruling may cause borrowers to reprice rather than refinance. This when a customer switches to another loan package, but the new loan package is from the same bank. This is especially true when clawback is a factor.
Currently with Bank A and switching to:
Cost to Refinance
(Within Clawback Period)
(Reprice within same bank)
Bank B (previously)
$3,500+ (Paid to Bank A)
Bank B (with the new MAS rule)
$7,000+ (Paid to Bank A and B)
Is an interest rate decrease of 0.4% worth $7,000?
It depends on how much 0.4% comes to. The refinancing might cover the cost of the fees in 6 months, 8 months, etc. But some borrowers may prefer to reprice and stay with Bank A, as a sort of compromise. We’ll see more of this as the new ruling kicks in.
3. Removes Clawback Concerns…Kind Of
In a few years, home loans won’t have clawback concerns. When there are no subsidies, there’s nothing for the bank to reclaim. That simplifies matters for the next batch of borrowers.
But this isn’t an advantage. Think about it: If you don’t break the clawback, you won’t incur any of these fees in the first place. The new ruling just makes you spend an extra $2,400 – $3,500, with zero benefit.
What is the Point of This Ruling?
Beats me. Follow us on Facebook, and when the full explanation is out, we’ll update you. In the meantime, here’s some speculation:
There has been news of banks giving lavish gifts to borrowers. Not key-chains and pizza discounts, but round-trip plane tickets and $500 shopping vouchers.
This is the sort of thing that makes MAS nervous, because it could allow banks to obscure the “true value” of a loan.
These expensive “gifts” might already be priced into the loan package. The borrower is given the impression that they are free, but is in fact paying for them. It’s devious. Now, relate this to legal fee subsidies and free valuations: Most banks present these as freebies, even if they’re already be priced into the loan.
If MAS is taking steps to ensure borrowers know the true value of loans, subsidies might be swept away with the other freebies. Because you will know the truth damn it (even if it costs you $3500).
Will the new ruling affect your decision to refinance? Comment and let us know!
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