When choosing home loans, most of us would look at headline interest rate in the first two years of the loan where there’s a lock-in period. Is that all that needs to be considered?
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Other than choosing between a floating rate at close to 1% today versus a fixed rate at 1.20%, there are some other considerations often neglected by borrowers when it comes to home loans:
1. Interest rate in the third year
On our website where we display all the prevailing mortgage rates, the default sort order is to look at the lowest average interest rate over a 3-year period, likewise in our Rates Report. And there’s a good reason why we do that.
For those who are refinancing their home loan, there’s always a legal fee subsidy (or cash rebate) clawback clause in the contract which requires you not to redeem the loan in full within 3 years. Otherwise, the bank will ask you to return this subsidy amount typically $1,800-2,000. On a $700,00 loan, that’s akin to a 0.30% interest cost.
So, the lock-in period may be two years, but you still can’t quite leave yet which means – you lose bargaining power when negotiating for repricing terms with your lender. Most homeowners think they can simply reprice with their existing bank once their lock-in is over. But not having that option of taking your business elsewhere means very likely you will not be offered the best rate from the bank (normally reserved for new-to-bank customers) and you have to settle. So, if you factor that “opportunity costs” into an average interest over a 3-year period instead, choosing the home loan package with the lowest promotional rate in the first two years may not always be the best deal on the table.
Rather, taking an average view on interest costs over three years might prove to be a better gauge which is what we always do when we ranked all the banks’ mortgage rates.
Of course, taking a 3-year fixed rate with a slightly higher interest rate solves that problem. But that’s a whole separate discussion as doing that entails paying a higher cost as the gap between 3-year fixed rate and floating rate is even bigger. Speak to our consultants who can share with you more insights on this topic.
2. Thereafter rate
Even after the third year, the interest rate charged by the bank from year 4 onwards may still be important consideration for some. This is because in an increasingly uncertain world where technology is disrupting many sectors globally, job stability may become a thing of the past. No one can be really secure in his or her job without constant upskilling and reskilling.
The last thing you want is to lose a job just when your interest starts to go higher after the lock-in period ends. For this reason, we always think it’s better to go for a floating rate home loan with a low constant spread (the mark up profit margin) throughout the tenure than a fixed rate home loan which often ends with a higher rate. This is especially important for those who work in sectors with facing headwinds.
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3. Flexibility for repayment
Why is repayment important? Two reasons. First, as most people tend to stretch their tenure to the maximum in order to service a lower monthly instalment, they are paying a higher interest component in the instalment every month. The only few viable ways to reduce this interest burden would be to shorten the tenure, reduce the interest rate, or simply prepay the principal sum once a year after bonuses.
Second, even though mortgage rates could be at historical low now but so is deposit rates in Singapore! For that small amount of 0.10-0.50% fixed deposit interest you earn right now, I think you could be better off financially prepaying part of your outstanding mortgage every now and then. And there are home loan packages which allow you to prepay without penalty during the lock-in period. Ask us.
Waiver of penalty due to sale (within the lock-in period)
4. Waiver of penalty due to sale (within the lock-in period)
The pandemic has shifted property buying patterns which we can now see from official figures. People are going for bigger floorplates which partially explains the euphoria behind big-sized HDB homes after the phased re-opening in Singapore. Some are moving further away from CBD area in a tradeoff for space with WFH set to become the new norm.
For those planning to sell their property and are now awaiting higher offers, it’s important to go for a home loan which comes with a waiver of penalty due to sale during the lock-in period. Note there’s still that legal fee subsidy clawback to pay (point 1 above) when you finally sell off your house within a 3-year period, but that’s a small fraction when compared to the 1.50% redemption penalty within the lock-in period.
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5. Lock-in period
Finally, even the lock-in period itself can be an important consideration for some. There are home loans in the market with shorter lock-in period of one year, or even no lock but at a somewhat higher interest rate. This can be important for those who are thinking of stretching their budget for a bigger unit but would like to quickly refinance and max out the tenure in order to bring down the monthly repayment after the purchase.
Objectively speaking, with borrowing costs at historical low and likely to “stay like that” ie. floating rate at near 1% and fixed at 1.20% for the next few years, there’s no better time to deploy more leverage than now. Still with property prices skyhigh, know the risks involved in doing so especially for those who work in sectors under threat. Caveat emptor.
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals. So, be it to refinance home loan, buy your next Singapore condo or even review your commercial property loan, speak to our dedicated team of mortgage consultants here for the best Singapore home loan rates.