When purchasing your first property via home financing, there are various factors to consider before committing into a loan. Different types of packages being offered in today’s market would mean that there are better options out there compared to 5 to 10 years ago. Usually, most buyers are only concerned about down payments or stamp duty payable for the property when they are looking for a unit in the market. Here are the few factors for a potential buyer to know before getting a home loan. Before getting a home loan however, one would need to prepare themselves for the stamp duty payable upon the completion of the property.
Types of loans
In Singapore, HDB flats represent about 80% of homes. HDB owners have a choice between taking a bank loan or a HDB loan. HDB loans are at 2.6% per annum. Banks have been able to offer lower interest rates compared to HDB loans. This has made most bank loans attractive, even for buyers who qualify for HDB loans. However, home loan rates charged by banks will fluctuate. In addition, once you take a bank loan for your HDB flat, you will no longer be able to revert back to HDB loan even if your bank loans interest rates go up in the future. It’s a one-way trip. As for HDB loan, few criteria are required before buyers can apply for such loans. HDB loans tend to have stable interest rates. To qualify for a HDB loan, here are some criteria to be met. At least one applicant must be a Singapore citizen and their total household income cannot be more than $12,000. He or She have not taken 2 or more HDB concessionary interest rate loans and this is only applicable for HDB flats (new or resale). Some housing loan could also include the stamp duty of the property being purchase by the buyer. Click here to view list of loans available in Singapore.
For most people, they would prefer to stretch out the housing loan to the longest eligible period. Don’t be fooled by this move, however. It may be tempting to choose longer loan durations because that makes your monthly repayments look more “affordable”. The fact is that the longer your loan duration, the more interest you incur and the more you pay in total. A housing loan of $500,000 at an interest rate of 2.5% over a 10-year period will work out to be a monthly repayment of $4,713, with a total interest cost of $65,560. If you extend the loan to a 30-year period, monthly repayment falls to $1,976. However, your total interest cost will be $211,360. In total, you pay $145,800 more in interest for taking a 30-year loan instead of a 10-year loan for a sum of $500,000.
Fixed or Floating Interest Rates?
Most home loan packages offered by banks allow homeowners to choose between fixed or floating interest rates. Understanding the differences between the two is relatively simple.
Fixed interest rate loans mean that the bank guarantees you a fixed rate for a period of time. This can be anywhere between one year to five years. Since banks are in the business of borrowing money at a lower interest rate, and then lending them out at a higher interest rate, to be guaranteeing a fixed interest rate for a period of time is actually considered a risk for them. As such, most banks are likely to charge you a higher interest rate premium compared to floating rates. It’s also important to note that fixed rates are only applicable for a period of time.
Floating rates are interest rates that change based on the benchmark rates that they are tied to. In Singapore, two types of rates are usually used. They are the Singapore Interbank Offered Rates (SIBOR) and the Singapore Swap Offer Rate (SOR). Most banks will charge the floating rates plus a margin. For example, a home loan could be quoted as 3-month SIBOR + 0.5%. This means you pay whatever the interest rate is for the 3-month SIBOR (e.g. 1.0%) + 0.5% for a total of 1.5%.
SIBOR or SOR?
Both SIBOR and SOR are common benchmarks that banks used to determine interest rates for home loans. They appear rather similar but are not the same. Here’s a simple guide to understanding how they are different.
SOR is quite similar to SIBOR with the only difference being that it takes into account the interest rate payable in US Dollar, and not Singapore Dollar. This means that SOR rate is affected by the USD/SGD exchange rate. SOR tends to be more volatile than SIBOR since it takes into consideration exchange rate as well.
SIBOR on the other hand, can be best understood as the interest rates that Singapore banks are willing to lend and borrow funds from one another at.
With the above explanation, one should consider which type of benchmark would be suitable for their loan package.
Floating Rate: 1-Month or 3-Month?
Be it SIBOR or SOR, most banks will allow you to choose your preferred benchmark rates to be based on either a 1-month or 3-month average. 1-month averages tend to be more volatile compared to 3-month average. In actuality, interest rates rarely fluctuate so much. However, you can see how the 1-month SIBOR is more sensitive to changes compared to the 3-month SIBOR.
Penalty for Early Repayment
Aside from the interest rates and period of the loan mentioned above, you should also take into consideration the future plans that you have for the property that you own. Most banks will charge a penalty for early repayment and redemption. This could be a small percentage, usually about 1.5%, of the amount that you borrowed. Therefore, if you are the type who intends to sell the property within the lock in period, you should take note of this clause.