Competition amongst Singapore banks has led to various loans tailored to our needs. We share some tips on what to look out for before applying home loans in Singapore.
What is a Best Loan?
Though some home loan packages look so inviting that you make choices immediately after making comparisons, the one with the best home loan rates is not necessarily suitable. Often, one will ask what the best loan is currently. Instead, you should ask what your requirements are.
So here are some tips to take into consideration when comparing mortgage rates in Singapore.
Fixed or Variable:
If you feel loan interest rates will increase, fixed rate mortgages might be better for you as it gives you a fixed loan interest rate that doesn't change even if market rates change. However if you think that the market-based rates such as SIBOR, SWAP/ SOR will drop, floating interest rate packages could be a better choice. One inconvenience is you have to adjust the installments when SIBOR or SOR changes, as informed by the bank.
Interest only mortgage:
These mortgage loans let you pay only the loan interest amount for a specified period. You thus make small monthly payments for some time before you start to pay off the loan principal amount as well. This is a wise decision to leverage your finances to buy an overseas property that allows you a higher rental yield. MAS has banned interest only home loans for Singapore properties.
Do your property research:
If this is your first property investment where you will be depending on rent to repay your loan, first find out more about the going rent in the area you intend to buy your house. Remember that if you plan to rent your house, it may lie vacant for some time. You thus need sufficient standby funds to pay your installments to avoid loan defaults.
You should know the holding period of the property, whether you are an home owner or property investor. Home loans in Singapore have a lock in period, ranging from zero to few years. Zero or smaller lock in period is appealing to short-term investors where they intend to sell the property within few years outside the lock in period. Selling the property is in effect, similar to fully redeeming your loan and this action usually attracts a fees charged by the bank if the mortgage is within the lock in period. Some banks in the past have launched mortgages that waive this fees if one make a full redemption via sale of a property. With the recent cooling measures in Singapore for residential properties, a longer lock in period may be logical since selling the property within the first 4 to 5 years will incur additional taxes imposed by the government. Mortgages with longer lock in period should has better perks, such as lower margin or spread or free fire insurance for more years.
Banks grant a legal subsidy when one takes up a mortgage loan for the private property or HDB flat. This legal subsidy goes towards the legal conveyancing fees charged by the law firm. Usually, the subsidy ranges from 0.4% to 0.5% of the loan amount, or $2,000 to $3,000, whichever is lower. Some banks may have tie ups with law firms that covers fully the legal fees even if the legal subsidy is insufficient to cover the legal fees.
Banks will have a panel of law firms that they work with. If one prefers to use a law firm not on the bank's panel, the bank will impose additional fees, above the typical legal conveyancing fees. This means you will have to pay more to use this law firm. Hence, it's prudent to check with the bank if you intend to use your own law firm. Otherwise, there is no reason not to utilize any of the law firms on the bank's panel, whom have been scrutinized and selected.
There are numerous housing loan terms where a lender can charge you more for your loan like processing, default, late payment, annual, cancellation, partial or full redemption and fall below fees. However at times, lenders may subsidize the closing costs through insurance premiums and valuation and legal fees.
Debt servicing ratio is a ratio banks use to calculate to decide if the loan is affordable to you. While different banks follow different acceptable rates, your financial commitments like car and study loans shouldn't exceed the TDSR threshold of 60%.
Mortgage insurance is necessary as if something happens to you wherein you lose your income, instead of your family facing the debt of the mortgage; the insurance company is responsible for the loan. It usually is a reducing term insurance, where the coverage reduces every year as the home loan amount decreases with the repayments. You can also determine the interest rate pegged to the insurance.