Pick the right housing loan

March 31, 2012

Whether you are a first-time home-buyer or are looking into investing in a property, securing the right housing loan package to suit your financial need is of utmost importance.

In Singapore, the major banks offer highly competitive housing loan interest rates and packages. Understanding the differences between these packages and their impact on your financial commitment will help you decide on the most suitable loan package.

What are the different housing loan packages available and which type of package is more suitable for whom?

Fixed-rate packages

With fixed-rate packages, the interest rates indicated are fixed and guaranteed for the initial few years. There are packages with fixed rates for the first year only, or with fixed rates up to two or three years.

Fixed interest rates for the initial years are calculated by the bank based on the cost of getting the funds to lend to the customer plus a spread.

The fixed interest rate housing loan packages of most banks have a fixed rate for the specific number of years stated in the letter of offer. Thereafter, the rates will be based on the bank’s board rates minus a discount stated in the letter of offer.

Fixed rate housing loans are more suitable for individuals who want stable monthly instalments. As the interest rate is fixed for the lock-in period, the monthly instalments will be fixed and will not change at all.

This will allow you to plan your finances in advance with more accuracy and stability.

Floating (variable or market-pegged) rate packages

Floating interest rate housing loans refer to two different housing loan packages offered by banks in Singapore.

Variable rate packages are based on the bank’s board rate minus a discount stated in the letter of offer. These packages can offer some level of stability as the bank has to inform customers of any changes 30 days in advance.

Variable interest rate packages are suitable for property buyers who want to capitalise on the current low interest rates but do not want to worry about reacting to sudden spikes in the market interest rates.

Market-pegged rate packages are pegged to the Singapore Interbank Offered Rate (SIBOR) or the Singapore Swap Offer Rate (SOR). The rates will move with changes to these market rates.

SIBOR is a publicly available rate by which banks lend to one another in Singapore. The SIBOR applied on your housing loan is the rate at 11am daily.

There are SIBOR for various tenors but housing loans in Singapore are typically based on the three-month SIBOR, even though some banks offer the one-month SIBOR.

The bank applies the SIBOR on a specific date known as the rate review date and adds on a specific percentage above the SIBOR to be used as the interest rates.

For example, if the three-month SIBOR is used, its interest rate will be reviewed every three months. Subsequently, the three-month SIBOR rate on the review date plus the add-on percentage will be used as the interest rate for the next three months until the next rate review date.

SOR is made up of SIBOR plus the bank’s lending cost.

Market-pegged interest rates are more suitable for savvy property owners who would like to capitalise on the low interest rates to minimise the interest payments they make on their current loans, and are aware that their home loan interest will move with changes in SIBOR or SOR.

How can one get advice on choosing a suitable loan package?

There are many ways to get advice for deciding on the best loan package. The easiest way is to speak to a mortgage specialist, who can assist you in establishing your financial needs, assessing your current financial position and recommending customised mortgage solutions.

You can also refer to an information brochure, About Home Loans – Key Questions to Ask the Bank Before Taking a Home Loan, published by The Association of Banks in Singapore. This is available in four languages -English, Chinese, Malay and Tamil – at www.abs.org.sg or www.moneysense.gov.sg.

In many situations, the lowest interest rate package at a particular point in time may not always be the best option as customers have different financial objectives they want to achieve. We strongly advise customers to understand their needs and financial goals better before deciding on a loan package to finance their property.

Talking to different sales staff from various banks will also allow you to have a better understanding of the market and how the bank will be able to service your long-term commitment.

If an individual hopes to invest in property, which type of loan package is more suitable?

If one wishes to invest in property with the view that prices will appreciate in the coming years, a floating rate package may be suitable.

In order to have some element of stability in the monthly instalment payable for the next couple of years, the customer can take up the mortgage choice package offered by OCBC Bank, which allows the customer to lower the monthly instalment payable.

This will allow him or her to enjoy the benefits of the current low interest rate as well as the stability offered by a fixed monthly payment.

Buying a home is a significant long-term commitment. When choosing a home loan, it is important for customers to take a holistic view that goes beyond just pricing.

Besides interest rates, factors that determine a good home loan package include the flexibility to customise a loan based on individual requirements such as quantum of cash, as well as CPF savings to be set aside from time to time.

Other value-added benefits such as legal subsidy, no prepayment penalty and simplicity in loan application processes are also important considerations.

By Phang Lah Hwa – head of consumer secured lending, global consumer financial services, at OCBC Bank

Source : Today – 30 March 2012