Top 5 mistakes to avoid for home loans
The decision to purchase your first home is probably the biggest financial decision in your life. However, with this big decision comes big responsibility, so make sure you don't make the following financial blunders.
Mistake #1: Not engaging a mortgage broker to assess their loan eligibility
Before committing your time and effort to purchasing a real estate property, you should always check your loan eligibility with a property loan specialist. The property loan specialist will be able to advise you on your loan eligibility based on your financial credibility and debt to income ratio (TDSR). This process is called In-Principle Approval (IPA). After an IPA has been obtained from the bank, you can be assured that banks will offer you a loan to fund your purchase of a real estate property. Moreover, a loan specialist will also assist you to calculate the maximum loan eligibility using your debt to income ratio. Therefore, you can decide on the property price range that you can purchase comfortably. Do not seek advice from your property agent to calculate your loan eligibility as this is not their forte. Leave the job to your loan specialist to ensure that your loan is done up professionally.
Mistake #2: Not comparing home loan packages before taking up new loans or refinancing
This is a common financial mistake made out of complacency and acting on an impulse. There are over 30 mortgage packages from 14 major banks and financial institutions in Singapore at any one time. To make things easier, use online comparison websites such as GoBear or engage your mortgage broker when comparing prevailing loan packages in the market.
A mere 0.20% difference can result in significant savings.
- Bank A package: 1.50%
- Bank B package: 1.30%
- Loan: $1,000,000
- Instalment: $3,451
- Difference of 0.20%
- Interest savings for 2 years: $3,898
A difference in 0.2% can save you $3,898. This is slightly more than one month of your home loan instalment! Do research and compare bank’s loan offers to get the right deal.
Mistake #3: Not understanding your objective after the Seller Stamp Duty Period
Firstly, you should be aware of your property seller stamp duty (SSD) holding period. SSD is implemented in the year 2010, with amendments in the year 2011 and most recently in the year 2017. Except for HDB where Minimum Occupation Period (MOP) is 5 years, SSD is used to penalise private property sellers from selling their property within a specified period of time. Upon knowing that your property is nearing or out of the SSD period, you should have an objective on whether your property will be sold in the near future. If there is an intention to sell, you should look at packages that have a no lock-in penalty clause when you refinance. The no lock-in period is important as you will not be penalised by the banks or financial institutions when you sell your property during the refinance period. Note that for no lock-in penalty loan packages, most of the time these are floating packages where the interest rates are volatile. Contrast with a loan package that has a lock-in clause e.g. 2 years. A full redemption penalty ranges from 0.75% to 2%; we are talking about potentially 5 to 6 digit figures penalty fees which can really add up and which should have been foreseen and saved. In current economic times, we would suggest avoiding SIBOR as its more volatile compared to fixed deposit rate.
Mistake #4: Stretching their loan tenor to the maximum during the low-interest environment
Maintaining good cash-flow is very important. However, take advantage of the low-interest environment and pay off your property sooner. The interest rate has been at an all-time low since 2008 until today. Shortening your loan tenor by 5 years will save you a significant amount of interest. The reason being your principle amount will be squeezed within the 5 years’ frame and the low-interest environment will be charged on the higher principle amount. Approximately 17.5% interest savings will be achieved if you shorten your loan tenor during the low-interest rate environment. In a nutshell, shorten loan tenor during low-interest rate environment and vice versa. Below is an example to illustrate. In a nutshell, why let the banks earn more from you when you can clear your mortgage sooner?
- 30 years’ loan tenor: $1,000 interest payable to the bank
- 25 years’ loan tenor: $1,000 interest payable to the bank (but you clear your loan in 25 years instead of 30 years).
Mistake #5: Forgetting that your real estate has an equity value
This is valid only for private properties; they can be cash-out by banks and financial institutions. Note that banks do not allow HDB to be cashed-out. A property equity means the value of your mortgaged property after deducting all charges or loans against it. Investment savvy or balance risk profile homeowners can have the opportunity to cash-out equity from their real estate properties and reinvest into a financial instrument that yields reasonable returns to offset the mortgage interest being charged by the bank.
- Property value: $1,000,000
- Outstanding loan: $500,000
- Cash-out equity: $200,000
- Total 1-year interest incurred: $10,372
- Equity reinvestment at 5% yield: $10,000
In essence, taking up a property loan might be your biggest financial decision in your life. Neglecting even the smallest details will cost you huge financial damage. The above 5 hand pick mistakes are just common issues facing home loan borrowers, there are others fine details such as choosing a good conveyancing law firm, knowing that legal/valuation subsidies can sometimes be negotiated with banks etc. can save you more money. That’s why we strongly advocate engaging a mortgage broker – Cost to you - Zero!
This article is written by Shaun Chuan from Mortgage 101 – Home loan and refinancing brokers representing more than 12 banks and financial institutions in Singapore.