Home Loan Fine Prints To Look Out For
When it comes to financial products, everyone is concerned about the fine prints involved. This is especially true for mortgage loans, which might be one of the largest liability we’ll take on in our lives. Besides looking out for the ones which offer the lowest interest rates, borrowers should also be aware of the fine prints as it can impact the amount you pay if you consider refinancing or re-pricing your loans in the future.
Interest rates is perhaps one of the most important component of your mortgage loan. There are many ways a bank prices its loans – SIBOR, SOR, internal board rate or involving complex calculations using one of these rate benchmarks.
While the SIBOR and SOR is publicised and transparent, the same cannot be said of banks’ internal rates and that’s where you need to be cautious. If you happen to choose the latter, make sure you drill down into how they are calculating the rates. If the bank is unable to give you a clear answer, it might be better to look out for something else because it is at their liberty to change rates when they want and you would be left to shoulder the extra financial burden. Lastly, be sure to ask for the effective interest rate instead of calculating your repayments using the advertised rate so that it takes into consideration the compounding effect.
Depending on the loan you choose, it may or may not come with a lock-in period. Borrowers usually enjoy a lower interest rate during the lock-in period and may experience a substantial rise in repayments after that. You’d need to take into consideration that during the lock-in (usually one to three years), you cannot refinance unless you are willing to pay a penalty fee which could come up to about 1.5 percent of the total loan. That’s a whopping $10,500 on a $700,000 loan. So if you think there’s a chance you might consider refinancing, look for loan packages with no lock-in period.
While most of the time lock-in periods are stated upfront, the “hidden” part applies to the fees and charges. For instance, you may need to forfeit some “free’ upfront goodies such as fire insurance and legal fees which you need to pay back if you decide to switch loans.
Are you buying an overseas property but staying in Singapore? If you are, you can still take a property loan from a local bank. Most of the time, you might be able to choose your loan currency to either be denominated in Singapore dollar or the currency of the country you are buying your property in. However, this will expose you to currency risk. This means that if you bought an apartment in Malaysia and you took up a loan in Ringgit, if the currency appreciate, you might end up having to pay more in Singapore dollar terms. At first, this may not look much but consider that a home loan usually stretches between 20 to 30 years of tenor, it can come up to a substantial amount.
If you are interested to know more about home loans in Singapore, then don’t forget to checkout our home loan guide to buying and selling property in Singapore.