HOW TO CHOOSE THE BEST HOME LOAN?

[SPECIAL GUIDE FOR FIRST-TIME HOME BUYERS/MORTGAGORS]

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 (or what is more commonly known as refinancing in Singapore) 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 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 Guide is neatly organized into 10 Parts as follows:

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

B. Best Floating Rate Home Loan For Private Properties

C. Best Fixed Rate Home Loan For Private Properties

D. Best Home Loan For Private Properties BUC (Building Under Construction)

E. Best Floating Rate Home Loan For HDB

F. Best Fixed Rate Home Loan For HDB

G. How To Choose Between Fixed And Floating Rate?

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

I. What's The Transaction Costs Involved & Should I Reprice Or Refinance?

J. What Is Amortization Of A Home Loan?

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

There are only two types of home loans out there – adjustable rate home loan (or more commonly known as floating rate in Singapore) OR fixed rate home loan. 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 subsequent parts below and you will see that in Singapore, unlike in the USA market where there are such fixed rate home loans up to entire tenure of the loan like 15-year or 30-year, 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.  However, most would prefer to offer a 2-year fixed rate mortgage. Therefore, most fixed rate period 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 much higher floating rate when the fixed rate period ends.

As even fixed rates eventually revert to a variable 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 3 types of mortgage pegs:

- SIBOR

- BOARD

- FDR (or fixed deposit rate)

For longest time just like everywhere else in the world, almost all mortgage loans in Singapore are pegged to BOARD rate or some kind of internal loan peg that banks create to price their home loan packages.  It can go by different names or acronyms from MR, MRP, MBR, SRFR, etc.

Due to rampant increases by banks and widespread unhappiness with BOARD rate back in last rate hike cycle in Singapore from 2004 to 2006, banks begin to start pricing home loans using the more transparent SIBOR (Singapore Interbank Bank Offer Rate, or money market rate that banks in Singapore lend to one another) in 2007.  That became the favorite home loan peg for the next decade as SIBOR remained low at 0.40% for long periods after the Great Financial crisis.

Things started to change when oil price crashed by end 2014 and SIBOR started to shoot up.  It was in 2014 that DBS pioneered FDR which it launched using the average of its 12-month and 24-month fixed deposit tranches called FHR (Fixed Deposit Home Rate). 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 (withdrawn in 2017), UOB’s FDPR, StanChart’s FDR, to HSBC’s TDMR.  They have also chosen to close and open selected 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 number of FD tranches within the same bank and how much the banks have increased the various tranches over time.  For this reason, it is advisable for homeowners to work with a professional mortgage broker who can better follow and track the FDR increases over time, rather than going alone when shopping and comparing home loan packages.

It is noteworthy to mention until today, there are still some people who confuse FDR home loans with fixed rates, thinking that it will “Fixed”.  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 advocate FDR over SIBOR as the preferred mortgage peg as conceptually it would lag behind any movements in SIBOR – SIBOR has to increase first!  So far this has proven to be the largely the case even with multiple FDR peg adjustments we have seen in 2018.  In other words, homeowners who are on FDR mortgage pegs may have received letters to inform them about rate hikes, but most would still be paying lower interests after the adjustment had they chosen to be on SIBOR home loans!  Incidentally, those on SIBOR home loans have also been receiving letters from their banks every 1 or 3-month indicating higher interests whenever SIBOR trends up.

B. Best Floating Rate Home Loan For Private Properties

At the prevailing floating rate of 1.85%, for every $100,000 of outstanding loan, the repayment works out to $416.59 on a tenure of 25 years.  So for a typical home loan of $700,000, monthly repayment will come to $2,916

1-Oct-2018	PACKAGE	LOAN PEG	YEAR 1	YEAR 2	YEAR 3	YEAR 4	LOCK-IN	PENALTY	LEGAL SUBSIDY	CAP	MIN. LOAN
								(REDEMPTION)	(REFINANCING)		(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	14FDPR	1.80%	1.88%	1.88%	1.88%	2 years	1.50%	0.40%	$1,800	$100,000	Click to Apply
	STANCHART Floating Rate	36FDR	1.95%	1.95%	1.95%	1.95%	2 years	1.50%	Yes	$1,800	$500,000	Click to Apply
	MAYBANK Floating Rate Home Loan	SRFR	1.78%	1.78%	1.78%	1.78%	2 years	1.50%	0.40%	$2,000	$200,000	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

C. Best Fixed Rate Home Loan For Private Properties

At the lowest 2-year fixed rate of 1.90% , for every $100,000 of outstanding loan, the repayment works out to $419 on a tenure of 25 years.  So for a home loan of $800,000 (to qualify for HSBC's lower rate of 1.90%), monthly repayment will come to $3,352

1-Oct-2018	PACKAGE	LOAN PEG	YEAR 1	YEAR 2	YEAR 3	YEAR 4	LOCK-IN	PENALTY	LEGAL SUBSIDY	CAP	MIN. LOAN
								(REDEMPTION)	(REFINANCING)		(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	14FDPR	2.18%	2.18%			2 years	1.50%	0.40%	$1,800	$100,000	Click to Apply
	UOB 3Y Fixed Rate Home Loan	14FDPR	2.38%	2.38%	2.38%		3 years	1.50%	0.40%	$1,800	$100,000	Click to Apply
	HSBC 2Y Fixed Rate Home Loan	1M SIBOR	1.90%	1.90%			2 years	1.50%	Yes	$2,000	$800,000	Click to Apply
	HSBC 3Y Fixed Rate Home Loan	1M SIBOR	2.00%	2.00%	2.00%		3 years	1.50%	Yes	$2,000	$800,000	Click to Apply
	MAYBANK 2Y Fixed Rate	SRFR	2.12%	2.12%			2 years	1.50%	0.40%	$2,000	$200,000	Click to Apply
	BANK OF CHINA 2Y Fixed Rate	3M SIBOR	1.95%	1.95%			2 years	1.75%	0.40%	$1,800	$500,000	Click to Apply
	BANK OF CHINA 3Y Fixed Rate	3M SIBOR	2.00%	2.00%	2.00%		3 years	1.75%	0.40%	$1,800	$500,000	Click to Apply
	STATE BANK OF INDIA 2Y Fixed Rate	BOARD	2.15%	2.15%			2 years	1.50%	0.40%	$1,000	$250,000	Click to Apply
	STATE BANK OF INDIA 3Y Fixed Rate	BOARD	2.10%	2.15%	2.20%		3 years	1.50%	0.40%	$1,000	$250,000	Click to Apply

D. Best Home Loan For Private Properties BUC (Building Under Construction)

At the prevailing floating rate of 1.75%, for every $100,000 of outstanding loan, the repayment works out to $411.70 on a tenure of 25 years.  So for a typical home loan of $700,000, monthly repayment will come to $2,883

1-Oct-2018	PACKAGE	LOAN PEG	YEAR 1	YEAR 2	YEAR 3	YEAR 4	LOCK-IN	PENALTY	LEGAL SUBSIDY	CAP	MIN. LOAN
								(CANCELLATION))	(NOT FOR PURCH)		(FOR SUBSIDY)
	DBS Floating Rate Home Loan	FHR8	1.75%	1.75%	1.75%	1.75%	None	0.75%	Nil	Nil	$100,000	Click to Apply
	OCBC Floating Rate Home Loan	MBR	1.95%	1.95%	1.95%	1.95%	None	0.75%	Nil	Nil	$200,000	Click to Apply
	UOB Floating Rate Home Loan	14FDPR	1.80%	1.80%	1.80%	1.80%	None	0.75%	Nil	Nil	$100,000	Click to Apply
	STANCHART Floating Rate	36FDR	1.95%	1.95%	1.95%	1.95%	None	1.50%	Nil	Nil	$100,000	Click to Apply
	MAYBANK Floating Rate	SRFR	1.75%	1.75%	1.75%	1.75%	None	1.50%	Nil	Nil	$100,000	Click to Apply

E. Best Floating Rate Home Loan For HDB

At the prevailing floating rate of 1.85%, for every $100,000 of outstanding loan, the repayment works out to $416.59 on a tenure of 25 years.  So for a typical HDB home loan of $350,000, monthly repayment will come to $1,458

1-Oct-2018	PACKAGE	LOAN PEG	YEAR 1	YEAR 2	YEAR 3	YEAR 4	LOCK-IN	PENALTY	LEGAL SUBSIDY	CAP	MIN. LOAN
								(REDEMPTION)	(REFINANCING)		(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	$1,800	$300,000	Click to Apply
	UOB Floating Rate Home Loan	14FDPR	1.80%	1.88%	1.88%	1.88%	2 years	1.50%	0.40%	$1,800	$100,000	Click to Apply
	STANCHART Floating Rate	36FDR	1.95%	1.95%	1.95%	1.95%	2 years	1.50%	Yes	$1,800	$400,000	Click to Apply
	MAYBANK Floating Rate	SRFR	1.78%	1.78%	1.78%	1.78%	2 years	1.50%	0.40%	$2,000	$100,000	Click to Apply
	HSBC Floating Rate Home Loan	TDMR24	1.85%	1.85%	1.85%	1.85%	2 years	1.50%	Yes	$1,000	$200,000	Click to Apply

F. Best Fixed Rate Home Loan For HDB

At the prevailing floating rate of 1.88%, for every $100,000 of outstanding loan, the repayment works out to $418.04 on a tenure of 25 years.  So for a typical HDB home loan of $350,000, monthly repayment will come to $1,463

1-Oct-2018	PACKAGE	LOAN PEG	YEAR 1	YEAR 2	YEAR 3	YEAR 4	LOCK-IN	PENALTY	LEGAL SUBSIDY	CAP	MIN. LOAN
								(REDEMPTION)	(REFINANCING)		(FOR SUBSIDY)
	HONG LEONG FINANCE 2Y Fixed	BOARD	1.88%	1.88%			2 years	1.50%	No	NA	$100,000	Click to Apply
	HONG LEONG FINANCE 3Y Fixed	BOARD	2.00%	2.10%	2.60%		3 years	1.50%	No	NA	$100,000	Click to Apply
	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	$1,800	$300,000	Click to Apply
	UOB 2Y Fixed Rate Home Loan	14FDPR	2.18%	2.18%			2 years	1.50%	0.40%	$1,800	$100,000	Click to Apply
	UOB 3Y Fixed Rate Home Loan	14FDPR	2.38%	2.38%	2.38%		3 years	1.50%	0.40%	$1,800	$100,000	Click to Apply
	MAYBANK 2Y Fixed Rate Home Loan	SRFR	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	$1,000	$200,000	Click to Apply
	HSBC 3Y Fixed Rate Home Loan	1M SIBOR	2.00%	2.00%	2.00%		3 years	1.50%	Yes	$1,000	$200,000	Click to Apply
	STATE BANK OF INDIA 2Y Fixed Rate	BOARD	2.15%	2.15%			2 years	1.50%	0.40%	$1,000	$250,000	Click to Apply
	STATE BANK OF INDIA 3Y Fixed Rate	BOARD	2.10%	2.15%	2.20%		3 years	1.50%	0.40%	$1,000	$250,000	Click to Apply

G. 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 a floating 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 home loan.  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.

H. 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 12% to 20% 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.

I. What's The Transaction Costs Involved & Should I 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 a 30-year average 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 home 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 transaction costs involved besides the savings from a lower interest rate.

There are two main transaction costs involved in refinancing of a home loan in Singapore - legal fees and valuation fees.  The costs will be different for private property versus HDB.

Refinancing Costs For Private Property (market average):
- Legal fee: $2,000-$2,300 (for loan up to $3m)
- Valuation fee: $400-$600 (for property value up to $2m)

Refinancing Costs For HDB (market average):
- Legal fee: $1,600-$1,800
- Valuation fee: $200-$250

To refinance a mortgage from Bank A to Bank B, you will need to engage a lawyer who sits in the panel of both banks to be able to represent both the incoming and outgoing mortgagee, as well as to represent the homeowner in the transfer of the mortgage document and lodgement and removal of caveats.  For private properties this cost is usually around $2,000 which should include the $500 mortgage document stamping fee.

To reprice within the same bank, there is no need to engage a law firm as there is no change in the mortgagee nor mortgagor but just a change in the loan package terms.  Unfortunately it still incurs a costs as most banks would levy an admin fee which can range from $300 to $1,000.

There are other type of less direct costs which would still hurt your pocket if you are not careful:
- Lock-in Period: This is the period (usually 2 years) during which you will not be able to pay down the outstanding loan in full or in parts when you try to reduce your interest burden.  Doing so would attract an early redemption penalty of 1.50% on the amount redeemed.
- Cancellation Fee: More a concern for those signing up for BUC (building-under-construction) home loans.  Though most of these are marketed as having no lock-in, the truth is you are really "locked in" at least up to the point of T.O.P. or completion of your project as an attempt to refinance out to another bank during the construction phase will attract cancellation fee of 0.75%-1.50% on the amounts which have yet to be disbursed or drawn down.  That is a steep costs as before T.O.P. at least 40% of the loan would not have been drawn down yet.
- Legal Fee Clawback: If you have been given a legal fee subsidy or cash rebate by your current bank when you refinance your home loan over earlier, there is almost certainly a "clawback" period of 3 years where you cannot redeem the loan in full which means you cannot refinance out within 3 years.  The bank will ask you to pay back this subsidy amount in full (not pro-rated) should you fail to do that.

To effectively contain all the costs over the entire tenure of the loan be it interest costs or transaction costs, 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:

a. 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.

b. 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.

c. 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.

J. 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 Guide has benefited you in giving an overview of the mortgage industry and how you should approach it.  Check out the latest mortgage interest rates below and work with the one of the most trusted team of mortgage advisors in town with the most reliable rates.  Contact us today!