A home loan can help you buy a property that you otherwise cannot afford to purchase. With truckloads of home loan schemes in the market, it can be difficult to choose the right one. Here’s a quick guide on how to go about selecting your home loan.
1. Fixed or Floating Rate?
First you need to decide if you want a fixed interest rate home loan or floating interest rate home loan.
Fixed rate home loan consists of fixed interest rates that do not fluctuate during the period that you are locked in at. The rates remain the same despite the changes in economy and market conditions. Fixed rate home loans usually have a higher but stable interest rate than floating rate home loans. Eg. 1% fixed for 3 years.
Floating rate home loans (aka variable rate home loans) typically consist of very low interest rates and in Singapore, they are usually pegged to SIBOR (Singapore Inter Bank Offset Rate) or SOR (Swap Offer Rate). SIBOR and SOR are transparent indexes, that the banks have no control over adjusting (You can think of this as the “cost price” for the bank). These rates fluctuate according to the market conditions, so you will need to keep tabs on them occasionally.
Banks will add a spread % (which can be thought of as their “profit margin”). Eg. Sibor + 1% (where 1% is the spread). Banks are currently offering very low spreads for floating rate packages to entice home buyers.
2. How long should you stretch your loan tenure for?
The longer you stretch out your loan, the more you end up paying in interest to the bank (because interest is charged annually). However, stretching out your loan over a longer period makes your monthly payments more affordable.
Think about what you are comfortable with affording monthly, and work from there. You don’t want to be paying so much for your mortgage that you have no money for anything else! The SmartLoans Home Loan Calculator allows you to calculate your monthly payments and then you can adjust your loan tenure accordingly to see what suits you best. Generally, banks will be able to give you a loan until you’re 70-75.
3. Other points to be aware of
Beware some gimmicks that banks use. Low rates may have a catch
High rates from year 4 onwards
Banks might give you low rates for the first 3 years to reel you in, but they might increase the rates from the 4th year onwards. Low initial rates work well for investors who are planning to sell soon after the 3 years. However, if this is for your own stay, you should consider the impact over the entire loan tenure.
Floating rates that are not pegged to SIBOR or SOR
Banks may hike up the rates at their discretion if your package is not pegged to SIBOR or SOR. I would strongly advise against taking loans which are pegged to the banks internal board rates.
A final note: Do your homework
Do your research before committing to any home loan. SmartLoans makes it easy for you with all the latest Singapore home loan rates published online.
If your loan amount is more than $500k, you might also qualify for lower deviated rates (which are not published). To get more information, visit sites like SmartLoans.sg. Their Home Loan Calculator has the most up to date information on Singapore housing loans available. SmartLoans is linked to all 12 banks in Singapore, and also employs mortgage specialists to advise you.
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