How To Choose A Home Loan?

[Special Section For First-time Home Owners]

This is a special section dedicated to educating first time homeowners and  mortgagors on how to shop for a residential home loan in Singapore, and what to consider during the first re-mortgaging exercise as generally most borrowers would refinance or reprice every two to three years in Singapore, which has proven to yield the lowest costs and compounded savings over entire tenure of the loan.

We will cover basic knowledge of how a mortgage works and all key concepts and considerations behind choosing the right home loan that is tailored to one’s unique needs and financial objective.  So, if you are have been in the mortgage market for some time and have gone through a few rounds of the re-mortgaging process, you may want to skip this section and just request for the latest Rates Report and speak with our consultants directly.

The section is organized into 7 Parts as follows:

1. Best Adjustable Or Floating Rate Mortgages In Singapore

2. What Are The Different Types Of Home Loans And Mortgage Pegs?

3. Best Fixed Rate Mortgages In Singapore

4. How To Choose Between Fixed And Floating Rate?

5. What Are The Key Considerations When Choosing A Home Loan?

6. Should One Reprice Or Refinance?

7. What Is Amortization Of A Home Loan?

We will start by giving you the lowdown on the latest floating rate based on FDR/OHR mortgage pegs which we will explain very shortly.  Just take a quick look down the table but do not worry about how to choose yet.

Best Adjustable Or Floating Rate Mortgages In Singapore

01-Oct-2018	PACKAGE	LOAN PEG	YEAR 1	YEAR 2	YEAR 3	YEAR 4	LOCK-IN	PENALTY	SUBSIDY	CAP	MIN. LOAN
									(FOR LEGAL)		(FOR SUBSIDY)
	DBS Floating Rate Home Loan	FHR8	1.75%	1.75%	1.75%	1.75%	2 years	1.50%	Yes	$2,000	$500,000	Click to Apply
	OCBC Floating Rate Home Loan	MBR	2.00%	2.00%	2.00%	2.30%	2 years	1.50%	Yes	$2,000	$500,000	Click to Apply
	UOB Floating Rate Home Loan	MR	1.80%	1.88%	1.88%	1.88%	2 years	1.50%	0.40%	$1,800	$100,000	Click to Apply
	SCB Floating Rate Home Loan	36FDR	1.95%	1.95%	1.95%	1.95%	2 years	1.50%	Yes	$1,800	$400,000	Click to Apply
	HSBC Floating Rate Home Loan	TDMR24	1.85%	1.85%	1.85%	1.85%	2 years	1.50%	Yes	$2,000	$500,000	Click to Apply

What Are The Different Types Of Home Loans And Mortgage Pegs?

There are really only two types of home loans – adjustable (or floating) rate OR fixed rate.  However, there are quite a number of mortgage pegs to choose from in the Singapore mortgage industry, a testament to the vibrancy of the mortgage business with intense competition from more than a handful of international banks.  This can only work for the benefit of consumers or homeowners.

We will show you the best fixed rates in the next section and you will see that in Singapore, unlike in the USA market where 15-year or 30-year fixed rates are anomaly, lenders here are quite reluctant to offer fixed rates beyond 3 years.  From time to time you do get certain banks offering up to a maximum 4 or 5 years.  Most would prefer to offer only a 2-year fixed rate mortgage. Therefore, most fixed rate terms would last only two to three years which is also a reason why almost all homeowners would review their mortgage options at end of a 3-year period.  It will be silly not to do so as the interest rate often reverts to a floating and much higher rate when the fixed rate period ends.

As even fixed rates eventually revert to an adjustable rate home loan over short periods, it is thus important to make sure you choose the right mortgage peg for your package as not all pegs will rise and fall by the same amount.

Mortgage peg is what you choose to base your loan on (or what it tracks so the bank calculates the interest to charge you based on a certain spread or margin it adds on to or subtract from this peg) and currently we have a choice of 4 types of mortgage pegs:

• SIBOR (Singapore Interbank Bank Offer Rate, or money market rate that banks lend to one another), usually 1-month or 3-month.
• BOARD
• FDR (or fixed deposit rate tranches)
• OHR (long-term average of 1M & 3M SIBOR currently offered only by OCBC)

Traditionally, almost all mortgage loans in Singapore are either pegged to SIBOR or BOARD.  It was only in 2014 that DBS pioneered FDR which it launched using the average of its 12-month and 24-month fixed deposit tranches called FHR.  Since then many other major mortgage players have rolled out their own versions of what we will refer to collectively as FDR (fixed deposit rate) home loans, from OCBC’s FDMR, UOB’s FDPR to HSBC’s TDMR.  They have also chosen to close and open selective FD tranches over time from 9-month, 14-month, 15-month to 48-month etc. and it has become quite difficult for the market to track the no. of FD tranches within the same bank and how much the banks have increased the various FDRs over time.  For this reason alone, it will be more advisable for homeowners to work with a professional mortgage broker who can better follow and monitor any developments or rate hikes in the market.

It is noteworthy to mention until today, there are still some people who confuse FDR home loans with fixed rates, thinking that it will not move.  Which is why at MortgageWise we do not like to use the term Fixed Deposit linked but rather just FDR.  It is just a mortgage peg not unlike BOARD which can be adjusted by lenders anytime by giving a one-month notice to their customers.

However, since the birth of FDRs in 2014, it has proven to be top choice for most homeowners in periods when interest rate is going up in general.  We have advocated FDR as a better choice than SIBOR as it lags behind any movements in SIBOR which has proven to be the largely the case.  Singapore banks have only recently (Feb 2018) enacted the first broad-based hike on FDR by average of 0.30% after some two years of holding back when SIBOR (3-month) has spiked from 0.87% to 1.37%.

In September 2017, OCBC became the first bank that departed from the rest of the market by replacing all its home loan packages (including FDR) with a whole new mortgage peg called OHR (OCBC Home Rate) where it claimed is referenced on the average of 1-month and 3-month SIBOR over long periods (it used a 12-year chart to illustrate) and which will not fluctuate with short term interest rates.  OHR was launched at 1.00%.  Only time will tell if OHR indeed does not fluctuate in the short term as the bank did not release a formula for how OHR is derived.  Still being one of Singapore’s big 3 lenders we believe the bank will lose a lot of good will in the market should it mis-manage this peg and we will give it a vote of confidence as the next best mortgage peg to consider next to fixed rate mortgages which we will give you the overview next.

Best Fixed Rate Mortgages In Singapore

01-Oct-2018	PACKAGE	LOAN PEG	YEAR 1	YEAR 2	YEAR 3	YEAR 4	LOCK-IN	PENALTY	SUBSIDY	CAP	MIN. LOAN
									(FOR LEGAL)		(FOR SUBSIDY)
	DBS 2Y Fixed Rate Home Loan	FHR8	2.18%	2.18%			2 years	1.50%	Yes	$2,000	$500,000	Click to Apply
	DBS 3Y Fixed Rate Home Loan	FHR8	2.38%	2.38%	2.38%		3 years	1.50%	Yes	$2,000	$500,000	Click to Apply
	OCBC 2Y Fixed Rate Home Loan	MBR	2.38%	2.38%			2 years	1.50%	Yes	$2,000	$500,000	Click to Apply
	UOB 2Y Fixed Rate Home Loan	MR	2.18%	2.18%			2 years	1.50%	0.40%	$1,800	$100,000	Click to Apply
	UOB 3Y Fixed Rate Home Loan	MR	2.38%	2.38%	2.38%		3 years	1.50%	0.40%	$1,800	$100,000	Click to Apply
	BOC 2Y Fixed Rate Home Loan	3M SIBOR	1.90%	1.90%			2 years	1.75%	0.40%	$1,800	$500,000	Click to Apply
	BOC 3Y Fixed Rate Home Loan	3M SIBOR	1.95%	2.00%	2.00%		3 years	1.75%	0.40%	$1,800	$500,000	Click to Apply
	MYB 2Y Fixed Rate Home Loan	BOARD	2.12%	2.12%			2 years	1.50%	0.40%	$2,000	$200,000	Click to Apply
	HSBC 2Y Fixed Rate Home Loan	1M SIBOR	1.90%	1.90%			2 years	1.50%	Yes	$2,000	$500,000	Click to Apply
	HSBC 3Y Fixed Rate Home Loan	1M SIBOR	2.00%	2.00%	2.00%		3 years	1.50%	Yes	$2,000	$500,000	Click to Apply

How To Choose Between Fixed And Floating Rate?

This is the perennial question we get and the answer is not always down to interest rate per se.  We always cover at least six other considerations to this question which will set you thinking hard:

1. Gap Between Fixed And Floating

The No.1 factor we look at is the general interest rate environment and the gap between the lowest fixed rate and the lowest floating rate home loan in the market.  And the general rule-of-thumb we employ is that if this gap is no more than 0.50 then it justifies locking down the higher fixed rates in an interest rate upswing cycle as the floating rate would have caught up in simply just two rounds of rate hikes within a year.

2. Investment Vs Owner-Occupied Property

Generally, an investor would stay more open to an adjustable rate that tracks the prevailing cost of funds like SIBOR as that represents an equitable borrowing cost.  Plus an investor would have rental income to cover the cashflow for servicing a monthly repayment that fluctuates based on the borrowing costs of the day.  In good economic climate when interest rates are rising, it also implies though not always that the property market is vibrant and rents are also going up.

On the other hand, homeowners paying a mortgage on the “roof-over-their-head” would need to service the monthly repayment from their hard-earned working income and if rates are rising, it is better to lock down a fixed rate mortgage in order for this cost not to overrun.

3. Flexibility For Sale Or Partial Paydown

Similar to the preceding point, there is another difference when it comes to investment vs own-use properties.  Investors may not like the idea of a lock-in period that typically comes with a fixed rate mortgage.  A lock-in or commitment period is an important commercial term in a mortgage contract where the borrower agrees not to redeem the loan in parts or in full in any circumstances including sale of property for a specified period in exchange for a lower interest rate or fixed rate offered by the lender.  In event this term is breached and they do need to redeem the loan, they would have to pay typically 1.50% of the amount redeemed as a lock-in penalty.  Investors want to be able to sell whenever an offer that is too good to be refused comes around, whereas home occupiers will usually have no qualms to tie themselves down to lock-in periods of three years or longer.

Increasingly we also detected when rates are rising, more people will want to retain the flexibility of being able to do partial redemption or repayment.  This is especially true for those who have built-up substantial CPF funds earning compounding interest at 2.50% p.a. while servicing their mortgage using cash in the last decade when interest rates languish in doldrums of 1%.  Should interest now head north of 2.50%, it would make perfect sense to deploy that huge CPF reserves and deleverage as the cost of borrowing now exceeds the CPF returns.

4. Size Of Outstanding Loan

This is the next biggest factor to consider after looking at the interest differential between fixed and floating.  Many do not realize for smaller loans like below $300,000, the costs of refinancing outweigh any interest savings from the exercise.  We do have a case study which you may like to read here.

5. Stability Of Income

As we enter the age of technological disruptions which can only gather pace and reach deeper into more areas of our lives and hence impacting more industries, income instability takes on more significance when it comes to leverage.  The last thing you want is to suffer a temporary drop in income due a change in job situations while at the same time receiving a letter from the bank at the same time that they are adjusting your mortgage repayment up the following month.

In Singapore, with TDSR (Total Debt Servicing Ratio) stipulated at 60% by MAS, one may not be able to refinance easily when income drops hence causing TDSR to go above this ratio.  Take note even though the central bank has given exemptions from TDSR for owner-occupied properties, most lenders would still apply their own internal credit policy of ensuring not extending loans to those with exceedingly high TDSR usually set at not more than 80%-100%.

6. Outlook On Interest Rate (And Peace-Of-Mind)

Although no one has a crystal ball, it is possible to make certain calculated assessment on the direction of interest rate movements from looking at macro events especially economic outlook in the US.  This is because there is a close correlation between SIBOR in Singapore and the Federal funds rate which is determined by US Federal Reserve and adjusted quarterly usually in their FOMC (Federal Open Market Committee) for March, June, September and December where there will be a press conference that follows.  See our chart to understand this correlation.

Singapore central bank MAS does not control domestic interest rate but opt to tighten or loosen monetary policy through a control of exchange rate on a basket of currencies against its major trading partners.  SIBOR which represents the rate at which banks lend to one another is determined primarily by the abundance or lack of liquidity in the banking system which in turn is affected by interest rates in the US and the strength of the dollar.

For those who do not have a strong view on how interest rates would move, it is advisable to work with a professional mortgage consultant who is better able to monitor financial market events and track any resultant movements.

We generally also advise those who would not mind paying a slightly higher premium (within reasonable grounds) for fixed rates to do away with all this guesswork (on interest rate movements) and just pay same instalment for easy cashflow management every month.  In other words, some people might just value that peace-of-mind on a fixed monthly repayment that would not increase come what may.  It boils down to personality and preference in some cases.

What Other Key Considerations When Choosing A Home Loan?

We have covered 6 factors when choosing between fixed and adjustable rate home loans.  From our collective learning from years of consulting with clients, there are other things to mull over before one signs on the dotted line:

7. How Much Interest Do You Want To Pay (To Enrich The Banks)

This question has got to do with tenure.  I have seen so many brokers out there dishing out advice frivolously without knowing the real impact themselves.  This is what they say – always go for the longest tenure as that means lower monthly repayments.

Many simply do not understand how much interest that one pays in a mortgage every month is driven by two things – the interest rate itself and the tenure:

• The higher the interest rate, more goes towards interest and less towards principal-reduction every month
• The longer the tenure, more goes towards interest and less towards principal reduction every month

For those who are more stretched, yes by all means go for the longest tenure at the start.  However, when one’s income and cashflow situation improves, during the next remortgaging exercise, re-visit the length of tenure.  There are some wise clients who rather service a higher mortgage with more going towards reducing the principal every month, than a lower mortgage but paying the bank more interest over time.  Food for thought.

We have a case study on this you may want to read here.  And we also cover the concept of loan amortization at the end.

8. Still Cannot Decide Between Fixed and Floating – How About Doing Both?

Many are unaware, there are lenders here who could structure a loan into two parts where you decide how much goes to a fixed rate and how much goes to a floating rate mortgage.  Some banks call it differently but we refer to such structures as combo loans where you get “best of both worlds – fixed and floating combined”.  Banks like HSBC, DBS, UOB offer combo loans.

How do you then decide how much goes to fixed and how much to floating?  There are some factors to consider.  Speak to our team of experienced consultants to find out more.

9. Equity Term Loan

Many old-school believe that leverage is a vice.  We think it depends on how you deploy it strategically to achieve higher returns using “other people’s money”.  However, we need to give the caveat that “a lot depends on the understanding of oneself” and it is very hard to manage emotions in financial investment especially when it comes to greed and fear.

Still private property allows for leveraging or gearing up when the property value has appreciated over the years just when the loan gets paid down steadily.  That means taking out an equity term loan (ETL) or additional loan secured against the equity portion of the asset value which has gone up.  MAS has strict guidelines on how much an investor can take out on an equity term loan based on how many mortgages one is already servicing and all ETL applications comes with pre-requisite of first fulfilling the 60% TDSR.

10. De-coupling Same Time As You Refinance

As the purchase of second property onwards in Singapore attracts ABSD (Additional Buyer’s Stamp Duty), the amount of tax ranging from 7% to 15% depending on one’s nationality, many looking to buy a second property soon will make use of the remortgaging opportunity to perform “de-coupling”.

Essentially this means when the mortgage is refinanced, one spouse decides to sell out his 50% share in the property to his partner at the same time hence relinquishing ownership of the property which then frees him up to buy another property as his first property (no ABSD).  There will be pros and cons as transferring of a property from A to B through a sale still attracts the usual BSD (Buyer’s Stamp Duty 3-4% depending on the purchase price, and SSD (Seller’s Stamp Duty) if any.

So far, we have covered at least 10 factors to consider when choosing a home loan in Singapore.  In the next part, we will look at another big question from most clients.

Should One Reprice Or Refinance?

Shopping for a mortgage is not a one-time transaction as many in Singapore would have realized.  And since it is one of the biggest expenditure item in a lifetime for the average homeowner (a typical loan of $800,000 over an average long-term 30 year interest rate of 3.5% p.a. means paying a total of $493,248 in interests costs if the loan is serviced to the last year), especially in an island-state where land prices are constantly inflating over the years, it calls for a disciplined approach to cost management.

Repricing means staying on with the current bank but changing to a different prevailing home loan package, whereas refinancing means changing to a different bank altogether.  How you should decide (to reprice or refinance) each time your loan comes up for renewal is to compare what your current bank would offer you as a repricing offer, with what else is there in the market, after factoring in all the costs involved besides the savings from a lower interest rate.

To effectively contain interest costs over time, we think the best strategy is to work with a mortgage professional who constantly monitors interest rate movements and access all available packages at his finger tip.  As in all things in life, it is always good to work a specialist who knows his stuff and the fact that a mortgage broker does this on a full-time basis he will be better able to advise you on the insights and latest trends in the industry.

And a good mortgage broker should not try to push you to refinance just so that he gets to do a deal (brokers do not handle repricing as that is done by customer retention team from the banks).  He should give you a comprehensive idea of all packages in the market along with some numbers to show you the cost and benefit of staying or switching.  Here at MortgageWise, we do that with our own proprietary MortgageWise Framework, a unique recommendation methodology, which comprises of three parts:

Part I: Interest-Simulation Model

An interest-simulation model showing you exactly how much interest you will pay given a certain amount and rate of increase over the next three years.

Part II: Net Position

Showing you your net position if you choose the recommended package over the repricing offer, taking into account all benefits from interest savings to discounts but after you minus away all the costs and fees you have to pay.

Part III: MortgageWise Matrix

Our unique matrix which handpicks the top few most popular packages in the market place after putting them to a rigorous process of debate and analysis from our team of consultants.

Not to sound self-serving, we cannot help but to share with you what we always hear from majority of all our clients something that all of us know inherently – ceteris paribus, it is always better to become a new mortgage customer to a new bank rather than staying on as an existing customer to your incumbent bank.  There are of course exceptions.  And it is not difficult to understand why this is an inherent problem for all businesses in all industries not just mortgage:

1. Companies and sales team are given higher and higher acquisition targets each financial year and all business units will do their utmost to bring in more new customers so that there will be more bonuses come end of the year. This is often done to the neglect of existing customers which is our next point.
2. Many companies are too focused on new account or customer acquisitions rather than building loyalty from existing customers. In fact many a times existing customers do not enjoy as much benefit or discount as marketing budget is only meant to hit acquisition numbers.  In the financial industry, the most poignant example would be credit card promotions and free gifts where if you really want to enjoy the benefit given to a new customer, this sometimes call for the need to cancel one’s credit card and wait for 6 months before applying again for the same card.
3. In the mortgage industry, lenders often dish out promotional interest rates but only in the first two to three years and the rates would revert to a higher floating rate after the promotional period. For this reason, few or perhaps none of the banks will want to call an existing homeowner 6 months before the lock-in expires to do a repricing to “another promotional” rate as that way the banks will never be able to “recoup” its investment or maximize its interest margin.  They would much rather hope that customers stay on their existing home loan package and continue to service their mortgage at the higher rates due to modern day “poverty-of-time” syndrome.

The last reason propels most to work with a mortgage broker based on what we observed in the last 5 years as more and more people become aware of such services.  It certainly makes more sense to work with an independent mortgage advisor, just like you would with your insurance and investment needs, whose personal interests is aligned with yours rather than with the banks.  Mortgage bankers are just sales people who are quite prepared to do a one-time deal with you as they know they may not deal with you again (repricing comes under another team of bankers).  Contrast that with mortgage brokers, if they give ill-advice just one-time, they risk losing the entire relationship and the whole pipeline of businesses where a homeowner refinances every two to three years in a loan tenure of 25 years!

To end this part, we think for the long term benefit of consumers or homeowners in Singapore, with all things being equal (ie. where one does not lose out in any way), it is always better to refinance rather than reprice.  Moving your mortgage every two to three years not only ensures that you always get the best deal out there from the lender who is most hungry for your business at that point (different banks have different surplus and tightening in funding at different points in time), it keeps all banks on their toes to always fight tooth and nail for new customers.  Imagine if all banks offer the same interest rate and decide to adjust their rates up together by the same amount, such absence of free market competition will lead to all of us paying more interest.

What Is Amortization Of A Home Loan?

First, let us understand how a home loan works – the concept of amortization of a loan.  When a lender (or the bank) lends you typically up to maximum 80% of the purchase price of the home you bought, over an agreed tenure of say 30 years, you are essentially taking on an obligation to pay the lender back over a 30-year period (or 30 x 12 = 360 months) at an agreed interest rate formula which will be the lowest for any form of leverage, as the loan is secured or collateralized by the subject property (the bank has a right to seize and foreclose on the property in event of defaults).  Typically, this secured lending interest rate ranges from 1% p.a. to as high as 9% p.a. (in 1990) before the 2008 Great Recession.  See our interest rate correlation chart under Resource.  This is unlike unsecured lending for example credit cards or revolving lines of credit where the nominal interest rate per annum fluctuates from 6% p.a. to 24% p.a.

Amortization of a loan refers to this process where the principal sum of the loan is paid down over the life of the loan (the agreed tenure), according to an amortization schedule which is usually based on monthly rest (which could also be daily rest), through a set of monthly repayments which consist of both a portion of interest earned by the bank and a portion to reduce the outstanding loan.  The interest portion will always be more in the initial years and gets reduced over time.

Amortization is the most equity model for loan repayments as opposed to straight-line calculations for example in hire-purchase car loans.  The only difference in calculations across the various banks in Singapore is when some banks choose to amortize on a daily rest basis (where the loan amount is reduced on a daily basis by applying a pro-rated daily interest rate, even though homeowners still receive a monthly mortgage statement) while others opt for monthly rest basis where this calculation takes place over 12 times in a year.  We have simulated both models and concluded that the savings does not make a whole lot of difference, with daily rest model resulting in a slightly lower overall interest payments in a year (as the loan gets reduced earlier on daily amortized basis).

Many are unaware, there are two drivers behind how much interest one pays in a monthly instalment – interest rate itself, and tenure.

Interest Rate – the higher the interest, more of the instalment goes to interest than principal reduction.  As a rule of thumb, when interest is 1.50% approximately one-third of the monthly repayment goes to the bank’s coffer.  However, when interest rises to 2.50% this goes up to 50% and when it reaches 3.5% it becomes the other way around – one-third goes to reduce your outstanding loan, and two-thirds of what you pay every month goes to the bank’s interest!  Now you know why people buy bank stocks when interest trends up.

Tenure – the longer the tenure, more of the instalment goes to interest than principal reduction.  As a rule of thumb for tenure, when you take a repayment period of 15 years, even though you service a bigger repayment amount every month, approximately two-third of what you pay goes to reduce your outstanding loan.  But when you increase the tenure to 20 years, this split is about 50:50.  When if you should stretch the tenure all the way to 30 years, then two-thirds of what you pay goes to interest.

We do have a case study to show this relationship between the percentage of interest in a mortgage with interest rate and tenure.  Read here.

Food for thought – What happens when you get longest tenure with huge increase in interest rate?

Speak to our consultants who can run an interest simulation so you know exactly should the interest forecast pan out exactly as how you have modelled, you can decide how much interest you like to pay to make the bank rich.

If you are a first-time homeowner or you are refinancing for the first time, we hope this special section has benefited you in giving an overview of the mortgage industry and how you should approach it.