Home Loans can be confusing, and in this article we try to help you understand the basics of comparing home loan options and give you some tips on doing your comparison properly.
1. Are you buying a new home loan or refinancing?
If you are looking at taking up a new home loan, what is the loan amount do you need? The maximum Loan-to-Value ratio is 80% of the property price. MAS regulations have restricted loans of more than 80% since 2010.
If you would like to refinance your current home loan, you would need to check if you are still locked in to your current bank. The best option to refinance is 2 or 3 months before your lock-in period expires. This would give you time to send in your cancellation form to your current bank and avoid prepayment penalty charges should you refinance before the lock-in period is over. When you refinance your home loan with another bank, there may be legal fees involved. These fees may come up to $2,500 or more. Some banks help subsidise the legal fees so that you don’t need to incur any cost.
2. What type of rates would you feel most comfortable with?
Choose between fixed rate and floating/variable rate packages.
Fixed rate home loan consists of fixed interest rates that do not fluctuate during the period that you are locked in for. The rates will remain the same despite changes in economy and market conditions. Fixed rate home loans usually have a higher interest rate than floating rate home loans.
Floating rate home loans typically consist of very low interest rates and, in Singapore, usually pegged to SIBOR (Singapore Inter Bank Offset Rate). You will have to keep track on the market conditions as well as SIBOR or SOR (Swap Offer Rate) when taking up a floating/variable rate package. Floating rates fluctuate according to the market condition but in this competitive market, banks are offering very low interest rates for floating rate packages to entice home buyers. A floating/variable rate package would be ideal if you are buying the property as investment or have the intention to refinance your mortgage in the future as there is usually no lock-in period.
If you find this confusing, you should use online tools like the MoneySmart Home Loan Wizard. The wizard is updated with the latest home loan rates from all banks in Singapore, and helps make your comparison and research process super easy.
3. Decide on a package with or without a lock-in period
For example, if you would like to sell your property in less than 2 years, you might want to consider a package that does not require a long duration of lock-in period or none at all. Another reason for choosing a package without lock-in period would be if you intend to refinance within the next few years.
4. Compare the cumulative interest payments between options
Once you’ve narrowed down your options, you should compare the cumulative interest payments throughout the tenure of your loan or for the lock-in period. The cumulative interest is the total interest amount that you’ll have to pay to the bank. You want this number to be as low as possible so that you pay the least interest throughout your home loan relationship with that bank.
Using the MoneySmart Home Loan Wizard makes it easy to compare your options as the loan results are sorted from lowest to highest, making it easy for you to quickly narrow down your best options from over 10 banks in Singapore. If you still are having any trouble, you can contact us and we would be happy to help you out!
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Tags: Home Loans