Last Updated On: 10 May, 2020
There are 7 major banks and 2 finance companies in Singapore that provide home loans to customers. It will certainly be a frustrating experience trying to call all of them and then figure out which one is the best for you especially when they come with different features besides pricing. What are some important factors to consider when one selects a mortgage?
Broadly-speaking there are 5 areas to look at and in a five-part series we like to cover them one by one starting with this article which explores the number one factor for most people – interest rate.
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Before we start let us first summarize the 5 factors of considerations in choosing a home loan. They are :
- Interest Rate
- Loan Restrictions (eg. lock-in period, prepayment penalty etc.)
- Special Features (eg. interest offset account, switching between sibor periods etc)?
- Personal Considerations
- Tenure and Loan-to-Value (LTV)
Let’s begin. As we have said earlier by and large interest rate is the single most important factor customers will look at when choosing a home loan. And when it comes to interest rate you have to further look into how it is structured and there are a few aspects which will be spelt out clearly in the loan offer document.
a) Promotional rate VS Long-term rate
Typically the bank will offer a lower spread (eg. +0.60% to +0.90%) hence a lower rate in the first three years of the loan, sometimes even up to first five years for sizeable loans. After this “promotional period” most banks will then revert the spread back to a higher “long-term” rate (typically +1.25%) which then applies throughout the rest of the remaining tenure. However from time to time there are banks in the market that buck this trend and offer to hold this “promotional” rate all through to the end of the loan tenure. That is certainly a big factor to weigh in your deliberation as it effectively saves you the trouble of having to refinance after the end of each promotional rate period or every 3 years.
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b) Floating rate VS Fixed rate
Next you also have to look the pros and cons between going for a floating rate package as opposed to a fixed rate. When interest rates are moving up, banks are not very keen to offer fixed rate as their cost of funds keep going up. The reverse will be true when rates come down like right now. So, the general advice for homeowners will be to go for fixed rates when rates are going up, and to go for floating rate home loans when rates come down.
So, how do we determine which way rates will go over the next few years? Frankly this is more of an art than science. There is no right or wrong answer and a lot depends on your own outlook on interest rate. Follow our blog post here as we bring you the latest scoops.
One of the most common mistake we observe is homeowners adopting the wrong strategy when interest rate cycle changes. We give an analogy of that in another article which may be of interest to you.
c) Market-pegged VS Board-pegged
How about which benchmark to peg your loan interest on? In Singapore, most banks offer only 2 benchmarks – money market indices (usually 1-month or 3-month SIBOR) or the bank’s own internal board rate for residential property. Usually the bank adds a markup as their profit, also known as a spread, over this 3-month SIBOR, or likewise subtracts a margin from its board rate, which then forms the final rate. Generally, most customers prefer a more transparent benchmark like 3-month SIBOR rather than board rates which is subject to the idiosyncrasies of the bank. There is a perception in the market that banks will be slow to reduce their board rate but quick to adjust upwards when money market rates start to move.
DBS pioneered the use of fixed deposit rates to price DBS home loans since 2014, called the FHR – Fixed Deposit Home Rate. It started with the average of the bank’s published 12-month and 24-month Singapore dollar time deposits rate but over the years have introduced many other tranches from 18-month, 9-month to the current 8-month called FHR8. We have advocated FHR home loans previously in periods when interest rates were going up as FHR has been perceived as more stable.
Watch this space for the next few write-ups on what else, other than interest rate, to consider in choosing the best loan package for yourself.
Alternatively, consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.