More people are now aware of the role mortgage brokers play compared to a decade ago when we first started our business.  Yet, not everyone is exactly clear how to go about choosing the best broker to work with?  Before that, do you choose the bank or the broker?

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In this article, let me try to articulate why working with the right broker is so important in the best way possible without sounding too self-serving.  

Working with the right broker is not just about comparing for the lowest rates.  Well, you can always do that yourself by calling just a handful of mortgage lenders in Singapore, if you really want to.  But, if it’s really that simple as collating all the banks’ packages and then pick the lowest number, why do we see so many people end up getting stuck in commitment periods when they come to us for mortgage review?

Besides saving you all the legwork in collating all the information from the various banks, which in itself is an arduous task as what rate you get depends on who you talk to at each bank, there are three other strategic reasons why you should work with an experienced mortgage broker over the longer term.

1. Get the big decisions right

I’ve alluded to this in my introduction.  Let me share with you what we continue to observe after 12 years in the mortgage advisory business:

“The single biggest and most common mistake homeowners make is to choose based on the lowest rate at one point in time, i.e. it’s on a particular dot on the interest rate cycle.  Rather, you ought to choose based on how to hedge yourself against the next most probable move or likely path of the curve!”

Most of the time, the interest cycle is either going up or coming down. For it to go on a protracted horizontal path where it finds the equilibrium, in other words achieving a neutral interest rate where the economy is neither overheating nor contracting, is something easier said than done.  That usually happens when the cycle hits a trough we’ve observed.

Knowing this fact, what does it tell you when it comes to choosing mortgage packages?  Opting for maximum optionality in a mortgage loan almost always win out rather than getting the lowest number on a dot!  Especially when that dot is most certain to move upwards or downwards during the next two years of your lock-in period. as the interest cycle twists and turns! 

To give you an analogy from my previous career as a realtor, that $50,000 less you paid for a property purchase after driving hard bargain with the seller, may not be worth as much as you thought, had you fail to get the big decisions right when it comes to property investment.  Did you pick the right location (core central region vs. mass market), the right property (landed vs. condo), and the right unit (premium view vs. lower floor with no view)?

Over the years, I’ve learnt from savvy high net worth property investors that it’s almost always more profitable to pay top dollar for premium or choice units in any development which tend to be those perched on higher floors with some of the best views in the development.  That’s because when it comes to property price, it follows a bell curve distribution too – choice units in a condominium always command higher prices which get accentuated even more when the entire curve rises in a buoyant property market. This phenomenon is even more pronounced in luxury developments as buyers come with deep pockets, especially foreign buyers who chase after premium units (even more so before the days of ABSD).

What’s the point I’m making? When selecting your mortgage package, getting the big decisions right (e.g. optionality, how to position against next move, etc.) is much more important than scoring quick wins like bargaining hard for the lowest rate (which may not be the lowest just a few months after you sign).

Any rookie broker can collate mortgage rates on a platter for you and show you what’s the lowest number to pick, but not everyone can give you sound advice based on the interest cycle and share with you the truly important considerations.

2. Property is the store value for wealth, and mortgage is the tool for it

We can all attest to how real estate is one of the best store value for wealth over long periods like decades.  That’s why clients with just a single residential private home tend to broach the topic of decoupling with us at some point, with the objective of buying a second residential property or even industrial and commercial properties.

When it comes to growing and preserving wealth from property investments, most can appreciate how mortgage is a wealth enabler.  It gives you leverage unlike other asset classes.  What’s interesting, though, is how most immediately see this leverage as a “bad debt” or burden immediately after the purchase, and seek to pare it down fast.

When you work with the right mortgage broker who truly understands the power of mortgage in building wealth, your whole perspective might change.

Let me give you a  most common example which some might not be fully aware (albeit this is more applicable to private property not HDB).  Do you know you actually have “two debts” to pay on your property, one being the mortgage and the other is the CPF withdrawn for housing plus accrued interest?  The latter is a “debt” you owe to yourself in the future which will be repaid or deducted from your sales proceeds upon sale of the property and be returned to your CPF OA.  For simplicity sake, let’s call this a “CPF loan” at 2.50%.  Do you know you can repay this CPF loan anytime, and not have to wait for sale of property?

If you understand the growing relevance of CPF Life, our national annuity scheme which takes care of basic needs for retirement in Singapore; and you also appreciate the power of compounding interest over long periods to grow your OA balance; do you know there’s a synergistic interplay between the two debts of mortgage and CPF loan?

It goes like this: If prevailing mortgage rate goes above 2.50% like in 2022-2025, it becomes no-brainer that you do partial repayment of mortgage using excess CPF OA balance if any. In essence, you are transferring your “more expensive” mortgage loan to your CPF loan.  After all you can’t touch those funds until much older.  However, when mortgage rate drops below 2.50% like now, you can “take back” more housing loan in the form of home equity loan or term loan (only for private properties) and put it back to your CPF OA so you start earning 2.50% returns but paying only 1.50% borrowing interest cost instead.  In short, you are now transferring back from CPF to your lower-cost mortgage loan.

What happens if mortgage rate go back up above 2.50% after you do this transfer?  Note one caveat here is you can’t withdraw from OA again to do partial repayment on a term loan!  CPF funds can only be used for the original housing loan.  So, you can always choose to pay off the remaining housing loan again.  The trick is not to repay fully the entire housing loan using CPF funds when interest rises.

In fact, if you have the right perspective of a “dual loan” on property investment with constant “toggling” of loan balances between the bank and CPF (remember that’s a loan you need to repay at 2.50% much later), you can say in theory your borrowing costs is in a way capped at or at least skewed towards 2.50% whenever the interest cycle goes on an upswing.  Suddenly, the idea of a floating rate package becomes less daunting for someone with high CPF balances. 

All that requires careful planning ahead which means you need to work with a good mortgage broker who tracks the interest cycle closely.  When it comes to gearing up on home equity loan, there are also certain restrictions and guidelines which a good broker can guide you along.

Bottom line: If you start to see mortgage not simply as a debt to be repaid quickly but a tool for wealth creation, you’ll discover more ways of leveraging home equity loan beyond just returning CPF funds withdrawn when you work with a good broker.  Some of these ideas are covered in our blog.

“The single biggest and most common mistake homeowners make is to choose based on the lowest rate at one point in time, i.e. it’s on a particular dot on the interest rate cycle.  Rather, you ought to choose based on how to hedge yourself against the next most probable move or likely path of the curve!”

3. Interest rate affects you financially more than you think

Interest rate is the “price of money”, thus it has outsized impact on all investment and financial decisions which most people underestimate, everything from savings, deposits, mortgages, CPF usage, asset class allocations, etc.  Yet, isn’t it strange that not many people bother to study, or even take a look at, the interest rate cycle before they make their mortgage decision?

By working with a trusted broker who tracks the interest rate cycle for you, not only will you be able to achieve maximum costs savings on mortgages, it will help you to determine in general when to:

• Quickly lock in your yield when interest drops and as all asset classes get repriced
• Go long or short on fixed deposit placement
• Go into longer duration Treasuries
• Start parking more funds to high-yield deposit interest accounts like DBS Multiplier, OCBC 360 Account, and UOB One Account just to name a few
• Rotate out of banks into REITs and vice versa (the two most interest rate-sensitive sectors in the economy)
• Rotate into bonds to lock in your yield with potential capital gains when interest rate drops, and vice versa
• Start using cash instead of CPF to service your monthly mortgage repayments
• Gear up or cash out on home equity loan (for private properties only) to deploy more leverage for maximum returns
• Invest more capex to expand your business

Perhaps even including when is the best time to sell your property? Property valuations are determined by demand and supply which is also in turn affected by the state of the economy and interest rates. When interest rate falls, cap rates gets compressed as the market chase up asset values leading to lower yield for investors.  “Don’t fight the Fed”. To a large extent, interest rate has a strong correlation to how the economy will perform which then gives you more hint on how much liquidity or dry powder you need to keep at bay and what you should consider for investments.

To give a disclaimer, we are not financial advisors to be able to give you qualified financial advice. Speak to one if you need. But we can certainly track the Fed and interest rate cycle much more closely than anyone else in our business.

If you have the right perspective of a “dual loan” on property investment with constant “toggling” of loan balances between the bank and CPF (remember that’s a loan you need to repay at 2.50% much later), you can say in theory your borrowing costs is in a way capped at or at least skewed towards 2.50% whenever the interest cycle goes on an upswing.  

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Conclusion

To end, I come back to the question I asked at the beginning – do you choose the bank or do you choose the broker?

Choosing the bank, in other words which package, is transactional in nature. Expect transactional or fleeting value in that process.  Approach a bank directly and you’ll get a sales pitch on how they have the best and lowest rate (you’ve been warned on that).  Some may give you direct one-off online gifting or extra cashback, but you may end up paying back much more interest without proper advice on the interest cycle.  Everyone in that transactional process just wants to close the deal, exactly because it’s just a transaction!  No one cares about you making the right decision in the long run.  Because they won’t be there two years later during your next review, let alone the duration of your loan tenure.

Choosing the right broker to partner with, on the other hand, is relational in nature.  Expect longer term and more durable benefit in that process.  Not only do we have to explain a lot more, so you can make a truly informed decision across the board from all banks, we also bear the onus of ensuring we helped you make the correct choice in accordance with where the interest cycle is going next.  Failing that, we won’t the repeat business again two years down the road.

So, be careful who you get advice from. Choosing which broker to work with is more than just about looking at numbers. 

At MortgageWise, we help clients navigate through the myriad of mortgage rates quick and fuss-free and get you the best home loan Singapore! Be it for residential or commercial property loan, work with us today!

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Disclaimer: MortgageWise Pte Ltd is not in the business of providing financial advice nor are we licensed or regulated by MAS under the Financial Advisory Act (FAA) in Singapore. All information presented are opinions and any representations given, whether by way of example, illustration or otherwise, are purely portfolio allocation advice and not recommendations or inducements to buy, sell or hold any particular investment product or class of investment product.  All opinions are generic in nature and are not tailored to the particular circumstances of any reader.  Seek advice from a qualified financial advisor before making any investment decision.

Though every effort has been made to ensure the accuracy of the information and figures presented, we make no representations or warranties with respect to the accuracy or completeness of the contents in this blog and specifically disclaim any implied warranties or fitness for a particular purpose.  We shall not be held responsible for any financial loss or any other damages suffered whatsoever, directly or indirectly, if you choose to follow any of the advice or recommendations given in this blog.