Given global and local economic uncertainties, it is more imperative than ever to save monies on your mortgage, particularly when it is such a huge financial commitment.
Take a minute to read this quick guide and you might find some useful tips.
Loan Types and Features
Before you take a home loan, you should do your homework and find out all the different types and loan features available in the market.
Banks may introduce new loan types every now and then, and who knows they may suit your financial situation perfectly. Choosing the right loan could translate into interest savings.
For example, if you are a hoarder who has squirrelled away a sizable amount of money in a saving account, let the money works harder for you by opting for an interest off-setting housing loan.
Such a loan allows you to have an account that pays the same interest rate on your saving (up to the maximum of your outstanding loan) as that charged on your mortgage. You will then have the option of using the interest earned to offset the interest on your mortgage.
Some interest-offset loans, however, may not pay the same interest rate as that on your mortgage, but the rate payable is still higher than for a typical saving account.
In other situations, a loan applicant maybe uncertain about interest rate trend and is undecided between a fixed-rate and variable-rate (aka. floating) loan. For instance, during a high interest-rate environment, a borrower may prefer a fixed-rate loan, but when rate heads south he will prefer a variable rate loan. In such cases he may opt for DBS Home Loan 2+2, which offers a fixed-rate for the first two years and the option of a fixed-rate or variable-rate in the third and fourth year.
Thus knowing about the various loan types available can help you make a better choice.
Rest is the frequency of compounding, or outstanding loan calculation. In finance literature, it is also commonly known as interest conversion.
Loans can come in daily-, monthly- , quarterly or annual-rest; and can be said to be XX-reducing. Most Singapore's mortgages are monthly-reducing.
Loans that are not based on monthly rest often still require monthly payments. All else being equal, loans that have shorter rest (calculated more often) will have lower interest.
So next time, do take note of the rest of your loan.
Making repayment on top of your regular instalments is usually a good way to reduce the total interest on your loan. Every time you make payment your outstanding balance is reduced; hence the interest chargeable will also fall provided that your loan is calculated often enough.
But if repayment is made during the lock-in period (normally the first 2 to 5 years of the loan), there maybe a penalty charge for partial or full repayment of the loan. This charge usually does not exceed 1.5% of the re-payed amount. Not all loans have lock-in periods though, but if yours do you might want to consider if the interest savings from prepayment outweigh the penalty.
For the HDB concessionary rate loan, there is no penalty charge. In fact, there is an interest rebates for prepayment.
The amount of rebate is calculated from:
Interest Rebate = (Amount Repaid x Interest Rate) / 12 x 1/ No of Days in the Month x (No of Days in the Month – Day in which Amount is Repaid)
Refinancing or repricing (conversion)
Finally you should consider changing to a different loan package after a few years. This is because most loans offer a lower rate in the initial years; after which the bank will made upward revisions.
Try to do so only after the lock-in expires to avoid penalty charges.
You may either change to a different loan package with the same bank (termed as repricing or conversion) who may charge a conversion fee. Or opt for a different bank (aka. refinancing).
Some borrowers slip into inertia after taking a home loan, and simply cannot be bothered to look for another loan package either because of the hassle of switching or they are too caught up with their lives.
However, refinancing or repricing is often an effective way to save on interest payments. You can turn to a mortgage consultant for free assistance who can help you in every stage, from loan selection to getting the paperwork in order.
For more home loan tips, visit www.icompareloan.com
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Susan Teo is a writer for research-focused Singapore mortgage consultancy firms: Property Buyer, iCompareLoan and Singapore Home Loan, which offer free professional advice and use reports from Singapore's best loan analysis system (exclusive to them) to help borrowers select the best property loan.