Things to consider for home loan.
Types of Singapore Home Loans Available and How to Choose Each
There are several banks offering home loans. The trick is finding out the one that suits your risk appetite, investment horizon and desired exit strategy. Since there are many banks, who by all means want you to take their loans, looking for the best home loan can be very confusing. This article serves as a good primer. Without going any further, it is important to look at the types of home loans available.
There are two types of home loans that are offered by banks. These are fixed rate home loans and adjustable rate home loans. Some banks offer a combination of the two types where there is a fixed rate for a predetermined period before transiting to a variable interest rate.
Fixed rate loans have a lock-in period that exposes you to penalties on any part of the loan repaid during the period. Mostly, they are fixed for a number of years. Different banks have different fixed periods. In a low-interest rate environment, they are very expensive. Due to uncertainty of future interest rate fluctuations, longer tenure loans have higher interest rates. It is the most popular type among Singaporeans. The main advantage is that it offers certainty of cash flow projections.
Adjustable/variable rate home loans offer a benchmark reference rate and an additional interest rate margin. The reference rate depends on the prevailing SIBOR rate, SOR rate or bank’s individually determined rates. For instance if you take it, you will repay 3 month SIBOR plus let’s say 0.7% p.a. They have no lock-in periods and tend to be cheaper in low-interest rate environments. The bottom line is that the borrower has a choice of first paying a portion of the loan and then repaying the loan anytime during the life of the loan.
You should look for a home loan that offers you the comfort and convenience of repayment. The most relevant part is the loan repayment. You must have the knowledge of calculating the interest rate. Most banks do not reveal this to you. You must ask them to help you calculate the interest using their amortization schedule plus any fees and other charges. A home loan calculator will serve the same purpose too.
Banks are out there to make profits. They employ salespeople who make the loan appear cheaper than it actually is. It is your business to calculate the effective interest rate. Effective interest rate is very different from the real interest rate. Actually, it is your financial responsibility in the entire period of the loan itself. It should help you choose the best bank that should you should take a home loan from. A low effective interest rate means that your total interest rate is low. However, you must not address the effective interest rate the same throughout the tenure as it is subject to fluctuations.
Other factors to consider when trying to make a good choice is the level of your monthly income, the purchase price of the property, and the estimate of the home. All of these will add up to how the bank intends to give out the loan. You also need to understand that Banks and Financial Institutions in Singapore have their own interior credit assesment criteria, which they normally use to determine the type of loan for which the loan seeker falls under or qualifies for. For this reason, housing loans in Singapore do not have a particular model they follow strictly, the nature for which the loan is being applied for plays a significant role in qualifying for a home loan. So if your income is on the high side, and your monthly expenses are greatly managed, then your loan application should come out with positive results.
In Singapore, Financial Institutions and Banks also employ the “Board rate”. This is another type of interest rate that is being considered when a home loan is applied for. The board rate is a minimum rate the bank charges the borrower in supplement to the spread. In other words, the board rate is always lesser or more than the actual loan interest rate which is charged to the borrower at a fixed premium, and is usually between 0.5% to 0.6%.
It is good to consider the “thereafter costs”. Banks will entice you by low interest rates. However, they do so for the first few years and then review them later to their advantage. Thereafter costs show the total interest for the entire loan tenure. It is advisable to avoid assumptions about refinancing. You must be conscious of your financial goals, market rates and the underlying trends.
Conclusively, the knowledge of the types of loans, the different types of interest rates considered in Singapore will most definitely play an important role in choosing the most appropriate home loan for the borrower or home loan seeker. Getting a home loan in Singapore can be a real profitable experience with all the flexibilities involved.