So, you have just collected your keys to your brand new home. You are all excited yet worried because there is so much to get done! You have to sort out your defects, renovations, utilities, internet, furniture and the list goes on…..
One area that is often neglected is your home loan. Your home loan is probably the biggest liability that you have. How you manage it, often determines whether you spend your yearly holiday in some exotic location like the Maldives versus say, Batam? Effective management of your home loan could mean cost savings of thousands of dollars a year in interest. So the question is, how do we manage our Home Loan effectively?
Banks in Singapore, more often than not, offer teaser rates for the first few years to lure new clients. Before you know it, the interest balloons up for the remaining loan tenure and slaps you in your face. This is especially so in the 3rd or 4th year of taking up your loan. I have consulted with many clients who have been overpaying their home loans for years, only to feel so cheated after realising what they could have done. However, rest assured that there are a few options open to you.
Someone who tells you that you must refinance is obviously not looking after your best interest. It really depends on whichever choice gives you the most savings or most suitable package.
Firstly, go find out how much interest you are currently paying when your interest rates are set to increase and note it down on your phone calendar with a reminder. Typically, we need to start the home loan review process 3-6 months before the interest rate balloons up or when you have collected keys to your new property. This is because most banks require at least 3 months’ notice period to refinance.
Firstly, you have to determine what sort of interest rate package is best for you. Cheaper isn’t always better. Is a Fixed or Floating Rate more suitable for me? What sort of floating rates? SIBOR? SOR? Board Rates? Do you go for something with or without a lock in period? (An agreed period of time where any prepayments to your home loan will incur penalties)
Fixed Rates are the safest option, it tells you exactly how much you are going to be paying during the Fixed period so that you can have better financial planning and management. They are generally more expensive though.
Floating Rates are generally cheaper, however, they tend to fluctuate with the market interest rates. In 2006, SIBOR went up to as high as 3.6%. My thoughts on this is that, only if you have a strong view that interest rates will continue to remain at current levels, or decrease within the next 3 years, then should you consider the floating rates. Otherwise, Fixed rates would be the safer alternative.
Floating rates are cheaper, and usually very tempting to select. However, this is usually a more myopic view.A slight increase in interest rates would wipe out all the savings enjoyed earlier. If you = still want to go with a floating rate, one strategy would be to take on a floating rate with no lock in period. That way, you still have the option to switch to a fixed rate package or pay down your loan, should interest rates increase.
New Home Loans or Refinancing
Floating Rates Start As Low As 1.40%
3 Year Fixed Rates Start As Low as 1.80%
Legal Subsidies Included
Another piece of advice I have that facilitates your decision making between fixed and floating is to put a monetary value to it. You can use this rule of thumb method, which generates quite accurate results for calculating interest savings for the first few years.
Every 0.1% of interest saved on a $1 million home loan equates to $1,000 in interest savings a year
Here is an example of a calculation to further elaborate this point
$500,000 outstanding Loan.
Best Floating rate 1.4%
Best Fixed rate 1.85%
Applying the rule of thumb we mentioned earlier, we know that a savings of 0.1% would equate to an additional $500 a year in interest savings.
The difference is 1.85-1.45% = 0.45% savings a year for the floating rate.
That equates to $500 X 4.5 times = $2,250 interest a year.
Therefore, the question is, would you be willing to pay an additional $2,250 a year to fix your interest rates?
Once you have established the type of rate you are interested in, now let’s look at your options to determine if you should reprice, refinance or continue with your existing home loan package at current interest rates.
For those of you that have collected keys, most banks typically offer a one-time free repricing within 6 months of TOP. Please make use of this and call up your bank to see what they can offer you. While speaking to your current bank’s repricing team, do check with them as well on what penalties you may incur if you refinance to another bank.
Do take note that for TOP projects, 15% of the purchase price usually have not been disbursed. This is due to the fact that developers still have a bunch of things to carry out before they get paid. This may include setting up of MCST and fixing defects before attaining CSC (Certificate of Statutory Completion). Please refer to your progressive payment schedule for more details.
If you were to refinance or fully pay down your loan, there would usually be a cancellation charge of 0.75% of this undisbursed amount. Once you’ve obtained the above details, go shop around and compare your home loan package with other banks interest rates. To avoid paying cancellation charge, one could wait for the project to obtain CSC, usually around 1 year later, before reviewing their options.
Cost of refinancing usually consist of 3 items and vary due to property size and type of legal firm
What you can do next, is a cost savings analysis for a 3 year period, as that is typically when it’s time to review your home loan again. Usually, we will select on the option that gives us the most savings, after factoring all the costs involved.
Employing the strategies, I have shared above will take you only a few hours once every 3 years. However, that should enable you to save thousands of dollars in interest and brings you one step closer to retirement. To facilitate things further, do reach out to our easyrates consultants who will assist you on the whole process for no fees. The interest rates we offer will be the same or sometimes even better than if you were to go directly to the banks.
Alternatively, you can call us at 6631 8980 or drop us an email at [email protected]
A former relationship manager turned full time entrepreneur and mortgage guru. When he’s not helping others save thousands on their mortgage, you can find him sweating it out at a CrossFit session or satisfying his wanderlust in a remote corner of the world.