Reading the fine print on your home loan: 7 essential clauses not to miss

A home loan is a long term financial commitment. Most of us hate to plough through a pile of pages with loads of jargon, but it is very important to understand the precise details of any contract to be signed, and a home loan is no different. No one wants an unpleasant surprise later. We have listed 7 clauses included in the fine print of your major mortgage document, which absolutely must be read and understood.

1. Lock-in period
This refers to the fixed number of years (usually a minimum of 1 year and up to no more than 5 years) during which time the borrower is obliged to maintain the mortgage with the same bank. The borrower will be financially penalised if he or she ‘breaks’ the lock-in before the specified period in the contract ends. It is common practice for banks to offer more attractive interest rates during the lock-in period, in an attempt to attract new borrowers, and prevent them from switching once they have taken out the mortgage. A fixed rate mortgage will almost certainly have a lock-in clause, and this is the ‘cost’ of keeping your monthly repayments unchanged. Floating rate mortgages do not tend to have a lock-in, but you need to check to be sure – and also confident that interest rates will not be rising any time soon!

2. Early redemption
Early redemption refers to the partial or full repayment of the home loan earlier than specified in the loan contract. The period of early redemption can cover up to the end of the loan term, or – more usually – up to the end of the lock-in period. Some banks will require a minimum loan amount be maintained. Others will allow a certain percentage of the loan to be repaid early. Penalties will typically range from 0.75% to 2% of the loan amount which has been repaid earlier than permitted under the terms of the contract.

3. Reference rate
Most of us are aware of the actual interest rate charged on our own home loan. However, not quite so many of us are familiar with the reference rate, which is the rate off which our particular loan is priced. All loans will tend to work off a reference rate, and there is a wide range of both fixed and floating rates. Typical reference rates used by many Singapore banks include a fixed or floating rate pegged to the Singapore Interbank Offer Rate (SIBOR), the Swap Offer Rate (SOR) or the banks’ internal rates. In the last 2 years, banks have even been using their fixed deposit rate as a reference rate.

4. Interest reset date
When you sign up for a mortgage loan, the reference rate related to your loan may come with an interest reset date. For example, if your loan is pegged to the 3M SIBOR, the bank may allow you to redeem the loan only on a specific date. Redeeming on any other date may incur a penalty.

5. Promotional rate commencement date
Banks will normally roll out promotional rates during the first few years of the home loan and they will usually commence the promotional term from the time the loan is actually approved. This timing is particularly crucial for a borrower who is buying a property still under construction. It is possible that by the time you use the loan to service your mortgage, a substantial part of the promotional period may have already elapsed.

6. Claw-back of subsidies
In the competitive home loan market, banks often throw in freebies such as free fire insurance, and subsidies for legal fees and valuation fees. These freebies take into consideration that the client is tied in to the mortgage with the bank for a couple of years. So if you decide to cancel your loan or refinance before the period during which you are permitted to do so, be prepared for these subsidies to be clawed back by the bank.

7. Repricing fees
A savvy loan borrower will typically look to refinance or reprice his or her home loan every 2 to 3 years, in the expectation of obtaining a new loan with a lower interest rate. Should you decide to stay with the same bank, it is always worth checking if repricing/conversion fees can be waived on the loan.

(By Lynette Tan)

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