Great Home Loan Discounts…Or Is It?
With the backdrop of a declining property market, property developers are trying their best to lure potential property buyers with discounts and perks, and banks are doing the same with home loan discounts as well.
One of the recent home loan discounts rolled out by DBS in May created quite a bit of frenzy in the market – the DBS May Day Home Loan. While the discount period has expired, it is worth looking at some of the fine prints of such discounts, as we can expect banks to roll out more of such sales tactics in this competitive climate.
Let us first take a look at the DBS May Day Home Loan offer in detail:
1st year fixed rate – 1% on the first $1 million
2nd & 3rd year – FHR18 + 1.17% p.a.
Thereafter – FHR18 + 1.20% p.a.
The FHR rate is the Fixed Deposit Home loan rate where loans are pegged to the prevailing Singapore dollar fixed deposit interest rate for amounts within $1,000 to $9,999. Currently, the FHR18 is at 0.6% per annum.
With such attractive rates, it does look like a good deal, at least at first glance. But that happens with most promotions, right? So what should one do if they want to compare the rates with other home loans?
Long term interest rates
Instead of just looking at the initial rates for a home loan, calculate the average rate or interest payments you are making for a given period. Most banks provide low initial rates for a home loan during the lock-in period, but straight after this period, there will be quite a substantial jump in rates.
A good way to gauge is to compare with 2 or 3 other similar loans and calculate the average rate you will pay for the next 3 to 4 years so that you can have a clear idea of which loan provides a better average rate.
Low home loan rates usually come with a minimum lock-in period. For instance, the DBS May Day promotion requires you to be locked in for a 3 year period, whereas a similar home loan does not have the same requirements.
Depending on the interest rate environment you are in, you may have a preference for no lock-in. For instance, if you see that interest rates are likely to remain low over the long term, then lock-ins may subject you to higher rates than what the market rate is offering. However, if you are at a point where interest rates are likely to rise, then a home loan with lock-in might be a better choice since you may be paying a lower rate than what the market is charging.
The problem with deposit-linked rates
There’s also a unique issue when you are taking up a deposit-linked home loan – the FHR is a floating rate, which means that it is up to the bank to adjust the rate. There is thus little predictability on your side over how much interest rates can increase over the course of time. This is where one may want to consider taking up home loans that are pegged to more transparent rates, such as the SIBOR or SOR. As these rates are publicly available compared to deposit-linked rate or board rates, you have more transparency over what you are paying for.
Claw back of Subsidies
Some banks offer certain privileges such as additional subsidies when you sign up with them. It is not uncommon for them to offer subsidies on legal fees, valuation fees or free fire and home insurance. While we are hanker over freebies, take note that these may be clawed back should you refinance within the lock-in period or may make you liable to certain penalties.
Take-up of additional products
Banks are increasingly dangling carrots to get customers to have more than one banking relationship with them. This can come in the form of having certain benefits when you take up more products with them. For the May Day home loan promotion, DBS requires the borrower to sign up for at least one of these products – ManuProtect Decreasing, ManuProtect Term or Manu Protect MoneyBack Policy.
While obviously the product can be of interest to you, it is also a form of cross-selling to get you to take up additional products, and also make you pay more.
Similarly, some banks may also offer you a lower rate if you sign up for a savings account with them. Consider the overall costs and benefits of taking up bundle products before you take up your home loan.