How to Choose a Housing Loan Wisely?

[Dennis Ng]

Business Times has a Property Special Supplement once a year. This years' Property Special Supplement is published on 27 Sep 2007 (Thursday). I've been invited by Business Times to write an article to share with readers on the things to look out for to ensure you choose a Housing Loan wisely.

Cheers!

Dennis Ng, http://www.HousingLoanSG.com

How to choose a housing loan?
DENNIS NG lists some criteria to look out for to ensure your package makes the most financial sense for you

Most consumers want to know which housing loan is the best in town. Unfortunately, that is the wrong question to ask.

There are more than 100 housing loan packages in the market and what is best for one person might not necessarily be the best for you. Each package has different features that are suitable for different needs.

Thus, a more appropriate question to ask is what are the factors that you should consider in choosing a housing loan? Here are some things you should note before signing on the dotted line for a home loan.

Pre-approval:
Before you close a deal to buy a property, it is advisable for you to first get pre-approved for a bank loan.

With the setting up of the Credit Bureau in 2002, banks can now check your repayment history of loans and credit cards taken up with other banks. Were you late in paying instalments? Have you ever been sued? If the answer is yes, banks may not approve your loan application or they might approve a lower loan quantum. This could jeopardise your purchase of a property, and you might even have to forfeit the option money you paid.

Loan duration:
A minimum loan duration is five years and the maximum 30 or 35 years, or till you are 65 or 70 years old, whichever is lower.

One way to decide on loan duration is to time the loan duration to match your intended retirement age. So, if you plan to retire by age 60, you should ensure the loan is fully paid up before you reach 60, rather than stretch it till you're 65.

Floating or fixed:
If you think interest rates have peaked and are likely to go down, you might want a floating rather than a fixed rate package.

However, if you're worried about the possibility of banks revising interest rates upwards, you might want a package which fixes the interest rate for the next one to three years instead. It might not make sense to fix rates for more than three years since the lock-in period for most packages ends after three years. You can always shop around for a better package after that.

Flexibility of repayments:
If you intend to make a lump sum repayment within the next one to three years, you should look for a package that offers you the flexibility to make such repayments without penalty. Some packages impose a penalty fee of up to 1.5 per cent of any lump sum repayment you make.

Transparency of rates:
If you want to know the exact basis for the interest rates charged on the housing loan, you can consider loans pegged to interest rates that are publicly available, such as the three-month Singapore Inter-bank Offer rate (Sibor) or Swap Offer Rate (SOR) which move according to market conditions.

Basically, a home buyer pays an agreed percentage above the variable SOR for a specified period.

You might want to consider such a package if transparency is a key issue for you and you are of the view that Sibor or SOR rates are falling rather than rising.

Penalties:
Ask if any penalty will be imposed if you make a full redemption of your loan and how long the penalty period is. Currently, there are some housing loan packages with zero penalty period, while most loans typically have a penalty period of one to three years.

Interest-only:
If you are a high income earner and in high tax bracket, choosing an interest-only mortgage might make sense. You benefit through savings in income tax as the interest portion of loan instalments for investment properties is tax-deductible.

This package also works well for short-term investors. By paying back only the interest, investors would benefit from lower cash outflow until they sell the property. As a result, they may be able to invest in two properties instead of one.

Interest-offset:
If you have substantial cash you might want to consider an interest-offset mortgage instead. This basically links your current account to your home loan. The interest earned in your current account is the same rate as that charged on your home loan. By offsetting the interest earned on your current account against your home loan interest, you can enjoy big savings - in time and money.

Every dollar you put into this current account would have same effect as making a partial repayment of your loan, but give you the added flexibility of drawing down the cash in the current account if you need to. Whereas if you do a lump sum prepayment, the cash is 'locked' in the property and you lose liquidity. Thus, an interest offset package enables you to pay a lower effective rate of interest on your housing loan so that a bigger portion of your monthly instalment goes toward reducing the principal. This allows you to pay off your loan sooner and pay less in interest.


Promotions:
Sometimes, banks might offer special promotional packages. If you engage the services of a mortgage broker, he would be able to provide you updated information on such promotions which could translate to additional interest savings for you.

Why better to apply loan through a Competent Mortgage Broker?
In the past, when consumers shopped for home loans, they had to contact each bank individually to gather information. This a tedious process that takes up a lot of time. In the last few years, with the emergence of independent mortgage brokers in Singapore, home loan shopping and comparison have been made easier.

Basically, an independent mortgage broker who knows your requirements can help you zoom in on the most attractive home loan packages. You typically do not have to pay for the service of a mortgage broker as banks pay them a fee as they also help banks save on staff costs and resources.

In more advanced countries such as the US and Australia, people usually apply for home loans through a mortgage broker rather than go to the bank directly. In Singapore, many people are still unaware of the services and benefits of engaging a mortgage broker, but things are likely to change with public education and increasing awareness.

The writer is a spokesman for Independent Mortgage Consultancy Portal www.HousingLoanSG.com

[Dennis Ng]

below is comments from someone on my posting and my reply to him.

Cheers!

Dennis Ng, http://www.HousingLoanSG.com

Originally posted by xinqun
go for HDB flats and took hdb loan is the cheapest.

definitely agree with xinqun. If a person can qualify for HDB Concessionary Loan, one should definitely apply to HDB.

However, there are many other people who need to apply a Bank Housing Loan instead, these include:

1. people buying private property
2. PRs (Permanent Residents) buying resale HDB flats
3. Singaporeans with monthly household income exceeding S$8,000
4. Singaporeans who downgrade (sell bigger house, and buy a smaller HDB Flat).
5. Singaporeans who move "laterally" eg. sell 4 room flat, and buy another 4 room flat.
6. Singaporeans who had two bites of the "cherry" (who had enjoyed 2 HDB concessionary rate loans.
7. anyone buying commercial properties, including HDB shophouses.

For all the above people, they have to get a Bank Housing Loan.

[investor10]

Hi Dennis,
I have an investment property using 3 month sibor, with the following conditions on full redemption.

3 months written notice to the bank or 1% penalty.
redemption has to be on the exact repricing date, meaning only 4 dates per year or 1.5% penalty

In order to meet condition 2, do I need to get the buyer agreement in the event I want to sell the property? Additionally the lawyer and housing agents must also be informed of the exact date, I think.
Appreciate your advice, thanks.

[investor10]

I have just sold an investment property, and can now share the experience with sibor linked morgage.

Banks are very strict on the repricing dates. For a 3 month sibor link morgage, means that there are only 4 dates in a year which the sale completion date must coincide. Usually the buyer will not agree to an extra long completion so that the seller can fullfill the repricing date requirement. Penalty from the bank can be 1-1.5% of outstanding loan or the original loan. Hence it is good to put this as a condition to the buyer upfront to avoid the bank penalty.

Sibor link packages are attractive due to their relatively low interest, however one need to be aware of the banks strict repricing date requirement.

[Dennis Ng]

I have just sold an investment property, and can now share the experience with sibor linked morgage.

Banks are very strict on the repricing dates. For a 3 month sibor link morgage, means that there are only 4 dates in a year which the sale completion date must coincide. Usually the buyer will not agree to an extra long completion so that the seller can fullfill the repricing date requirement. Penalty from the bank can be 1-1.5% of outstanding loan or the original loan. Hence it is good to put this as a condition to the buyer upfront to avoid the bank penalty.

Sibor link packages are attractive due to their relatively low interest, however one need to be aware of the banks strict repricing date requirement.

Hi investor10,
the fact is there are sibor linked packages without such a restriction, that you would NOT end up paying penalty fee because of missing the interest rate fixing date.

So this goes to show once again that when home buyers and consumers want to choose a Housing Loan, the wiser thing to do is to engage the services of an Independent Mortgage Broking firm, such as www.HousingLoanSG.com

I was the first person in Singapore to provide Mortgage Broking service back in year 2001, then I set up a company to provide this service in year 2003. When I started providing the service, consumers do not even know what is Mortgage Broking, and why should they engage our services, that I have to educate each person who enquired...10 years later, now when people engage our service, most of them know the benefits and my staff need NOT explain this to them. (I did the Sowing, now my staff Reap what I sowed).

Do you know that every month there are changes to Housing Loan pacakges? That there are 15 financial institutions actively providing Housing Loans, and each of them possibly offers easily 5 to 15 different Housing Loan packages? That at any point in time, there are easily over 130 different Housing Loan packages available in the market?

That many of these packages differ in only some minor terms and conditions, which might suit different needs of different people?

The service www.HousingLoanSG.com provides is FREE to consumers. So there is nothing to lose and everything to gain for consumers to engage our service.

Engaging our service you definitely save time, instead of you yourself calling different banks and try to do a comparison yourself, we do a one-stop unbiased Comparison and Analysis for you, based on your needs and requirements, for you to make the final decision yourself.

You can save money, since our service ensures that you will definitely get the Best deal in Housing Loans, since you have compared ALL Home Loan packages in the market and not missing out any package or bank.

The bank pays us a fee when you apply a loan through us. We provide a one-stop service, helping you to check valuation (with professional valuers); helping you to link up with Law firms and also helping you One Stop Enquiry service on CPF rules, HDB rules and Tax rules pertaining to Property and Property Financing.

Our expertise is known and trusted by many. This may be why Business Times each year when they have a once a year Property Supplement, they don't ask any bank to write the ONLY article on Housing Loan, but instead for the last 5 years, they only ask one person, that is me, to write the article on Housing Loan, as they know that we are Unbiased and when I write article, I don't try to favour any bank against another.

[investor10]

Hi Dennis,
Actually my loan was done through your company. All the sibor packages I was given to choose from has the penalty fee. I would certainly have chosen one without the penalty if I was given one.

[Dennis Ng]

Hi Dennis,
Actually my loan was done through your company. All the sibor packages I was given to choose from has the penalty fee. I would certainly have chosen one without the penalty if I was given one.

Hi investor10,
guess you took the loan when SIBOR packages were just launched then, at that time, all the packages have such penalty fee.

Nowadays, there are sibor-linked packages without such penalty fee.

Housing Loan market is very dynamic and competitive, there are changes all the time.

[investor10]

Hi Dennis,
Yes my loan was taken in 2008. I suppose some banks are now also offering sibor loans without such penalty due to customer complains. A friend of mine took a 1 year sibor link loan. His penalty if there is one, would run into tens of thousand.

[Dennis Ng]

Hi Dennis,
Yes my loan was taken in 2008. I suppose some banks are now also offering sibor loans without such penalty due to customer complains. A friend of mine took a 1 year sibor link loan. His penalty if there is one, would run into tens of thousand.

Hi investor10,
DBS was the first to launch sibor-linked packages in late 2007, in response to complaints by consumers writing in to forum that banks' Board Rates are not transparent...then other banks started to follow to offer sibor-linked packages...

Yes, nowadays there are sibor-linked packages without such penalty...the Housing Loan market is very dynamic, packages are changed as frequently as every month.

[patng8]

Hi Dennis,
Yes my loan was taken in 2008. I suppose some banks are now also offering sibor loans without such penalty due to customer complains. A friend of mine took a 1 year sibor link loan. His penalty if there is one, would run into tens of thousand.

Hi investor10,
DBS was the first to launch sibor-linked packages in late 2007, in response to complaints by consumers writing in to forum that banks' Board Rates are not transparent...then other banks started to follow to offer sibor-linked packages...

Yes, nowadays there are sibor-linked packages without such penalty...the Housing Loan market is very dynamic, packages are changed as frequently as every month.

Hi Dennis

My loan was also taken in 2009 and thru your company. The notice period likewise must tie in with the 3 mths SIBOR, otherwise penalty equivalent to 3 mths interest will apply.

[Dennis Ng]

Hi Dennis,
Yes my loan was taken in 2008. I suppose some banks are now also offering sibor loans without such penalty due to customer complains. A friend of mine took a 1 year sibor link loan. His penalty if there is one, would run into tens of thousand.

Hi investor10,
DBS was the first to launch sibor-linked packages in late 2007, in response to complaints by consumers writing in to forum that banks' Board Rates are not transparent...then other banks started to follow to offer sibor-linked packages...

Yes, nowadays there are sibor-linked packages without such penalty...the Housing Loan market is very dynamic, packages are changed as frequently as every month.

Hi Dennis

My loan was also taken in 2009 and thru your company. The notice period likewise must tie in with the 3 mths SIBOR, otherwise penalty equivalent to 3 mths interest will apply.

Hi Patng8,

as I said, NOWADAYS there are packages without such penalty, year 2009 was 2 years ago.

Housing Loan market is very dynamic, there are changes EVERY Month.

[ngtfook]

Loan duration:
A minimum loan duration is five years and the maximum 30 or 35 years, or till you are 65 or 70 years old, whichever is lower.

One way to decide on loan duration is to time the loan duration to match your intended retirement age. So, if you plan to retire by age 60, you should ensure the loan is fully paid up before you reach 60, rather than stretch it till you're 65.

Hi Dennis,
I am 51 now. Sold my old condo and buy resale condo. I took a loan last year and the loan period is up to age 70. If I want to retire at 55, do you think I should full settle the balance loan when I reach 55 years old?

I intend to buy an investment property in near future, say in 2012. My plan is to take max loan till age 75. Assume that the cashflow is positive every month and I have 1 year contigency fund to pay installment during down period. This investment property is not really for me but for next generation. Do you think this is a wise option?

thanks. Ray

[Dennis Ng]

Loan duration:
A minimum loan duration is five years and the maximum 30 or 35 years, or till you are 65 or 70 years old, whichever is lower.

One way to decide on loan duration is to time the loan duration to match your intended retirement age. So, if you plan to retire by age 60, you should ensure the loan is fully paid up before you reach 60, rather than stretch it till you're 65.

Hi Dennis,
I am 51 now. Sold my old condo and buy resale condo. I took a loan last year and the loan period is up to age 70. If I want to retire at 55, do you think I should full settle the balance loan when I reach 55 years old?

I intend to buy an investment property in near future, say in 2012. My plan is to take max loan till age 75. Assume that the cashflow is positive every month and I have 1 year contigency fund to pay installment during down period. This investment property is not really for me but for next generation. Do you think this is a wise option?

thanks. Ray

For own property that you stay, match the loan period to retirement age.

For Investment property, can maximise loan period to age 70 (for most banks) or whatever age banks willing to grant to you, as the main person paying instalment is not you (the owner) but the tenant.

If buying property at your age, need to be more careful, you should standby enough Cash or CPF to pay for at least 12 months of Housing Loan instalment in case property NOT rented out or interest rates shoot up.

As Dr Tony Tan said:"when you take care of the downside, the upside takes care of itself." (Always factor in downside risks first).

[ngtfook]

Hi Dennis,

thanks for the super fast reply and good advise.

[candy_chia]

Hi Dennis, do correct me if I am wrong.

Update of the latest requirement for those need to apply for BANK Housing LOAN:

1. people buying private property
2. PRs (Permanent Residents) buying resale HDB flats
3. Singaporeans with monthly household income exceeding S$8,000
4. Singaporeans who had two bites of the "cherry" (who had enjoyed 2 HDB concessionary rate loans.
5. anyone buying commercial properties, including HDB shophouses

I belong to 6th group, enjoy 1 hdb concessionary rate loan (as I took a CPF housing grant) but elect to take bank loan.

Decision to take bank loan is not because of low interest rate from bank(0.88% for 1st year, 2% for 2nd year) but I don't want to utilise 50% of sale proceed from flat disposed to finance for next flat purchased.

[Dennis Ng wrote]

However, there are many other people who need to apply a Bank Housing Loan instead, these include:

1. people buying private property
2. PRs (Permanent Residents) buying resale HDB flats
3. Singaporeans with monthly household income exceeding S$8,000
4. Singaporeans who downgrade (sell bigger house, and buy a smaller HDB Flat).
5. Singaporeans who move "laterally" eg. sell 4 room flat, and buy another 4 room flat.
6. Singaporeans who had two bites of the "cherry" (who had enjoyed 2 HDB concessionary rate loans.
7. anyone buying commercial properties, including HDB shophouses.

For all the above people, they have to get a Bank Housing Loan.[/quote]