If you want a Singapore home loan from a foreign bank, chances are you’re uninformed, desperate, and not very choosy. And if you approach banks in that state, you’re basically like a diver who just strapped tuna steaks to his ass and dived into the Orca enclosure in Sea World. Know what to look for, to avoid financial slaughter:
1. Understand How the Interest Rate Works
In most countries, banks will offer a floating rate (the rate varies according to an index), or a fixed rate (the rate stays the same).
The exact definition of “fixed” and “floating” differs between countries. In Singapore, a “fixed rate” is temporary; it lasts for a certain number of years before reverting to a floating rate. In countries like the United States, a fixed rate might last for the entire loan tenure.
Some countries’ banks also offer “split rates”, in which one part of the home loan is fixed, and the other part is variable.
If you’re getting a floating or split rate, find out how the rate is determined. Home loans in the United Kingdom might be pegged to the London Interbank Offered Rate (LIBOR), whereas most local bank loans are pegged to the Singapore Interbank Offered Rate (SIBOR). You will need to track this index, to know if it’s time to refinance.
Alternatively, some banks will offer you internal rates (board rates), which are determined by how badly the director wants a new Ferrari.
2. Can You Switch Between Currencies for Loan Repayments?
When you take an overseas loan, a major concern is always the foreign exchange rate. If the strength of the Singapore dollar rises, your home loan will be cheaper. If it falls, your home loan becomes more expensive.
For this reason, most borrowers seek loan packages that let them “switch” currency – Some packages give you an option as to which currency they want to pay in, at the time of each loan repayment (or at specified time periods).
Talk to mortgage specialists at MoneySmart for more details.
3. How Does Refinancing Work?
If you’re on a floating rate, or the foreign exchange rate turns against you,you’ll want to refinance. In Singapore the rules are clear: as long as you’re out of your bank’s lock-in period, you can switch to any home loan package you like. But this may not be the case in foreign banks, particularly those with perpetual fixed rates*.
(*In general, the lock-in period lasts for as long as the fixed rate. So if you have a fixed rate for five years, you probably have a five year lock-in.)
Also, consider the conveyancing costs that come with refinancing. Even among local banks, the conveyancing fees can amount to $2,500 – $3,000. These may be much higher overseas, depending on the kind of legal paperwork needed.
4. Do You Have In-Principle Approval?
Foreign banks may calculate your net worth and loan servicing ratios differently. Right now this isn’t too big a problem – our cooling measures have tightened debt servicing ratios, so in most foreign countries you can borrow more.
In any case, always get in-principle approval before buying the property. The last thing you want is to pay a deposit, and then realise the bank won’t lend you the rest. Never assume that you’re worth as much to a foreign bank as you are to a local one.
5. Beware of “No Down Payment” or “No Deposit” Home Loans
In Singapore, home loans are capped at 80% of the property value. This isn’t the case in other countries. Some foreign banks offer “no down payment” or “no deposit” home loans, which come close to full financing (e.g. 95% of the property value).
These things are the krakens of the home loans ocean. They eat borrowers whole, and poop them out as broken, homeless hobos.
Many of these packages come with mandatory, overpriced mortgage insurance, or insanely high interest rates. These are coupled with restrictive clauses, which prevent easy refinancing later on.
Even if you can get one of these loans (the requirements are stringent, because banks like to ensure their prey is helpless), think twice. It’s a mistake you could regret for years to come.
Do you have an overseas home loan? Comment and tell us how it’s going!
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Tags: Home Loans