There are basically two main type of loans
loans where fixed interest rates usually apply for an initial period(usually three years), after which a floating rate will be used. The main advantage of a fixed rate loan is to allow the borrower to enjoy a fixed rate for a set time period to protect against higher repayments due to possible higher interest rates in the near future. However, do note that with these types of loans, the floating rate after the initial period will usually be higher compared to a variable interest rate loan. A fixed interest rate home loan also gives the borrower a predictable monthly repayment schedule.
This is a good option in a low interest rate environment or if you want to budget with certainty over the initial few years of your loan.
loan which can be within a range provided by the bank or SIBOR-dependent. Those who prefer a floating rate home loan wants to capitalise on the current low interest rates but also open themselves to the risk that market interest rates may increase in the future.
As with any other products, the best way to choose a mortgage loan that suits your needs best is to shop around. Do not be enticed by frivolous promotions such as sign-up gifts or headline rates. Instead, one should look at comparing key features such as interest rates, lock-in period and applicable fees. Banks can also charge cancellation fees should you decide to switch loans mid-way or decide to re-finance.
Effective Interest Rate (EIR)
The EIR shows the cost of interest expressed on an annual basis that you need to bear throughout the tenor of your loan. Note that the EIR may be higher compared to the advertised rate for the loan for a particular period as the EIR takes into consideration the cost of interest for the entire period. In short, the lower the EIR, the lower the cost of financing your mortgage loan.
Your monthly instalment repayment consists of two parts – principal repayment and interest payment. It will be best if you could ask your bank for a loan repayment schedule which shows clearly how much you have to pay each month for both the initial years as well as over the entire loan tenor.
If you are able to pay off more than the stated monthly repayments, you can consider shortening the loan tenor, reducing the loan quantum by paying off part of it earlier or increasing your monthly repayment. By doing this, you will be able to save on the total amount of interest paid over the entire loan tenor.
Banks usually grant loans with a minimum tenor of 5 years up to a maximum tenure of 30 years subject to the condition that you must not exceed the age of 70 years old at the end of the loan tenor.
Loan Application Process
Now that you know what to look out for before you choose a mortgage loan, how do you go about doing it?
To put it simply, applying for a home loan is a 3-step process :
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