How to Choose Your Mortgage

By Mr Propwise from Propwise.sg.  

Choosing a mortgage can be confusing. There are so many options to think about: fixed or floating interest rates, loan term, lock-in periods, subsidies, penalties and other special features. There isn’t one “best” mortgage out there – it all depends on your needs and preferences.

Here are the main options you need to consider when making your decision:

1) Loan amount

The local banks usually give a loan of up to 80% of the property value for first time homebuyers, but the actual amount will depend on their assessment of your ability to repay the loan. They typically look at a debt servicing ratio of 35-50% as a ceiling. To calculate this ratio, they sum up your long-term liabilities (including the potential mortgage payment) and divide that by your monthly income. You can check out the affordability and mortgage payment calculators at Loanguru to estimate the maximum amount that you can borrow and your potential monthly payment.

Also note that the bank will only lend you up to 80% of the LOWER of your purchase price or their own internal valuation. So if your purchase price is above their valuation, you will have to top up the difference in cash. As a best practice, you should always get an indicative valuation and in-principle approval from a bank before you commit to a purchase.

2) Loan term

The loan term is the duration of time that you take to completely repay the loan. Loan terms usually range from 10 to 35 years. The longer your loan term, the smaller the monthly repayment you need to make, but the higher the total amount of interest you will eventually pay.

Also note that your age may be a limiting factor – banks will typically cap the maximum term up to the age of 65. So if you’re 50 years old, you may only be given a loan term of up to 15 years. Young buyers looking to maximize the amount they can borrow will usually select a 35 year loan term.

3) Fixed or floating rate

Fixed rates offer the borrower security and stability as the rate does not change over a certain period. As interest rates are currently very low, if they rise you will be protected from upward adjustments of your monthly mortgage payment. But this comes at a price – fixed rate packages usually charge higher interest than floating rate packages.

Borrowers who believe that interest rates will fall or remain low for a long period of time can go for floating rate packages as they can get lower interest rates up front and their monthly payments will fall if interest rates fall.

For floating or variable rate packages, they are typically linked to either of the two major benchmark rates: Sibor and the Swap Offer Rate (SOR). These rates are mainly affected by US interest rates and Singapore banking system liquidity. But do not assume that they will always stay at the lows they currently are at (e.g. the SIBOR is around 0.5% now) – in 2007 they were as high as 3.6%! As a rule of thumb, you should look at your monthly payments using rates of 4% to make sure you can still service your mortgage in case rates spike up.

4) Other special features

Some loans have an interest offset feature, where deposits at the bank can be used to offset the loan amount so you only pay the interest on the difference. For borrowers with large amounts of cash that they want to keep available for other uses at a moment’s notice (e.g. investing in the stock market) this could be a good option.

Some banks also offer interest-only packages, usually on a case-by-case basis. For these loans, you only pay the interest amount for a specified period of time, and after that the loan will revert to a normal interest plus principle loan. This option may be suitable for investors who want to minimize the cash outflow during the interest only period.

5) Subsidies, lock-in period and penalties

Most loans come with some subsidies including the legal, valuation and fire insurance fees. When comparing mortgages, borrowers should check what the various fee subsidy amounts are. For example, there is usually a cap of $2,000-2,500 on the legal fee, and if your legal fees exceed those you will have to top up the difference.

The lock-in period you should choose depends on your expectation of when you will sell the property and also on your view of where interest rates are going. Typically the shorter the lock-in period, the higher the interest rate. But if you repay the mortgage within the lock-in period, you typically have to pay a penalty of anywhere from 0.75% to 1.5%, which is substantial. Some banks can waive the penalty if you are selling your house (as opposed to just repaying the mortgage), so make sure you check if they will include this clause.

Here’s a tip to save you money – sometimes the bank can give you an additional discount off their advertised interest rates, especially if you’ve been a longstanding customer. Just ask! I’ve known people who have gotten a 0.05% discount – that adds up to some serious money.

If you feel overwhelmed by all the different options above, you can also consider engaging the services of a mortgage broker, who will help to filter the right packages for you based on your requirements. You should not have to pay them any fee as they will get a commission from the bank if they can successfully arrange a loan for you. Happy mortgage shopping!