Naturally most people will think that the best home loan means those with the lowest interest rates in the market.  However, they forgot that there’s generally a trade-off between lower rates during the promotional or lock-in period typically two years, and higher interest rates thereafter when the lock-in ends.  And there’s a reason why lock-in may be two years for most home loan packages but the legal subsidy (or cash rebate) clawback period is three years.  Hence, the interest rate in the third year of the mortgage is still an important consideration notwithstanding the fact you can reprice within the bank.  This is probably one of the most overlooked factor for refinancing.

Understand there are different types of home loans in Singapore.  Besides choosing the lowest headline interest rate in the first few years, there might be other pertinent considerations you should consider:

(a) Fixed rate home loan vs. ARM (adjustable rate mortgage)

This is often the most difficult decision to make as it requires some expert view on the direction of interest rates over the medium term. Hence, it warrants a separate discussion of its own (see Q5 below).

The best home loan should allow you to hedge your interest costs when rates are rising during that part of the interest cycle; and let you reap the benefits of a quickly falling mortgage peg in periods when rates crashed as we have just witnessed in 2020.  So, choosing the right mortgage peg is important for a home loan which lead us into our next point.

(b) Choosing the right home loan mortgage peg: SORA, FHR or BOARD?

Generally there are two types of mortgage pegs that banks will price their home loans on. These are reference indices which value will vary over time and hence the mortgage interest and repayment every month will also vary accordingly.

(1) BOARD

The first type is banks’ internal loan pegs which can be Prime or BOARD lending rates.  Prime plus a spread is used more for corporate loans.  Consumer bridging loan is still charged at “prime plus” rate for some banks.  BOARD is more commonly used and no matter what acronyms are used by various banks – it is basically a lending peg which is set and determined solely by the bank.  And sometimes within the same bank you can have many tranches of BOARD rates with serial numbers based on dates.  This allows the bank to decide to raise the loan peg (and hence interest charged) for certain groups of customers based on when the whole batch of loan books were signed, but not for the entire mortgage portfolio.  As the bank could raise BOARD rate unilaterally and selectively, and this information is not published anywhere (other than giving a one-month notice in writing to affected borrowers), BOARD is deemed the mortgage peg with least transparency.

(2) FHR/FDR

There’s yet another kind of banks’ internal loan pegs first made popular by DBS bank in 2014 when they started pegging mortgages to fixed deposit rate tranches called FHR (fixed deposit home rate).  Until today, some people still get confused and thought that the FHR home loan they signed were fixed rate home loans, when they are just floating rates pegged to fixed deposit rates published by the bank.  For this reason we like to refer to such loan pegs as FDR home loans (fixed deposit rate home loans).  More banks started introducing FDR home loans of their own from 2015 the likes of OCBC, UOB, MAYBANK, SCB, HSBC but slowly one by one retracted such loans and by 2020 only 3 banks still offer FDR home loans: DBS FHR, SCB FDR and HSBC TDMR.  FDR pegs were initially popular when interest rates were low but subsequent rate hikes in the period from 2017-2019 gave them a bad name as the market perceived FDR pegs to be “quick to rise but slow to come down”.  It has very much taken on the nature of BOARD rates except that fixed deposit rates were published officially on the banks’ website and hence more transparent.  At MortgageWise, we do track the movements of FDR/FHR over time for a historical perspective on how banks managed such internal loan pegs vis-a-vis SIBOR which is the second type of mortgage peg we like to discuss.

(3) SORA

MAS (Monetary Authority of Singapore) has mandated that banks replace SIBOR with the new SORA (Singapore Overnight Rate Average) peg in phases by 2024.  SORA is a more robust loan peg where its compounded value is published on MAS’ website for 1-month, 3-month and 6-month.  1-month compounded SORA is the compounded average of daily spot SORA over the past 30 days whereas 3-month compounded SORA is likewise the compounded average over the past 90 days.  As such, compounded SORA values are backward-looking in nature.  Read our low-down on how exactly Compounded SORA works.

We are one of the few, if not the only, broker site that has mapped out the historical values of 3-month compounded SORA in the last 15 years since 2005.  And just like its predecessor SIBOR, it has shown very strong correlation with the US Fed funds rate and both are tracked rigorously and published us on this website..

(c) Waiver of penalty due to sale of property during the lock-in period

The best home loan lets you save not just in while servicing it, but when you decide to end it suddenly.

After the covid-19 pandemic, we anticipated a trend for bigger homes or an extra bedroom room or at least a study.  This has already borne out in the rising prices for bigger HDB flats in Singapore.  The need for space is evident with WFH (working from home) and HBL (home-based learning) set to become part of the new norm both for work as well as for schools.

Even for those not planning for sale of your existing property, you will never know when your plans might change, or when you will suddenly have an offer that’s proving too good to pass up.

The problem with sale is that most home loan packages come with 2-year lock-in period which means you have to fork out additional $10,000 in redemption penalties based on 1.50% on a typical $700,000 mortgage.  That’s much more than the interest you’ll save when comparing between various home loans typically just within whiskers of 0.20% ($1,400 per year on the same $700,000 mortgage).  So, choose the home loan package that comes with waiver of this penalty when the redemption is due to sale of the property during the lock-in period.

Note however there would be that $2,000 legal fee clawback to pay when you break a loan due to sale and that happens within the first 3 years of the tenure.   Still, that’s only 20% of an estimated $10,000 penalty (for $700,000 home loan).

(d) Prepayment partially without penalty within the lock-in period

The best home loan should also allow you to prepay regularly especially when you get your annual bonuses.  That might prove to be the single most important thing to do to reduce mortgage costs in the long run, more so than choosing the right home loan package.  Reducing the outstanding loan regularly helps not only to reduce the monthly repayment, but it allows you to opt for a shorter tenure when you next refinance the home loan – which all leads to a much reduced interest component in your monthly repayment.  And if you also choose to work with a trusted mortgage broker over time, who ensures that you jump from one lowest rate home loan to the next whenever your lock-in/claw-back period expires, you definitely save on all fronts of a mortgage equation: tenure, principal amount as well as interest.

As many of our clients have discovered in the “lower-for-longer” interest rate environment of the past decade (2009-2020), regular prepayment has helped to lessen their financial burden and they will end up with a fully-paid property much earlier than thought.  Choose the home loan package that lets you prepay without penalty up to a certain percentage of the outstanding home loan, at any point in time.

(e) Free conversion

Free conversion simply means that the bank will allow you to “convert” to another home loan package within the bank at no costs, ie.waiver of the repricing or conversion fee typically at $300-500, at the end of your lock-in period.

How is that important?  This goes back to what we just said at the start where most homeowners overlooked the interest rate in the third year of the tenure where they can’t quite leave yet.  This means that there is already less bargaining power with your existing bank to negotiating for the lowest prevailing rate out there be it fixed or floating.  And if you add this $500 repricing fee which is akin to a 0.1% or at least 0.05% interest in one year, you are definitely getting the shorter end of the stick.

And do you know from time to time there might even be free conversion WITHIN the lock-in period.  This means that you can actually switch to a more favourable home loan package when something new and better comes up which wasn’t available at the point when you refinanced the home loan.  Speak to our consultants to find out more.

You can see there is no one best home loan for everyone.  Even the interest rate per se differs based on the loan quantum these days.  The lowest headline interest rate you see on most broker sites are reserved only for the very big loans like above $1.5m or $2m.  For the average loan sizes of between $500,000 to $1m, the interest rate offered might differ based on “deviations” hence it’s important you work with established brokers who can get you better overall terms – the lowest rate as well as the best overall terms of a mortgage.

Also find out the unique attributes of DBS Home Loan, OCBC Home Loan, UOB Home Loan and how to choose between the Big 3 local banks, plus a few other worthy international banks and why we recommend them.