Choosing the best mortgage loan

The soaring SIBOR rates have created much havoc for many home owners as banks started to adjust upward their mortgage interest rates. I am one of those affected as my bank increased the interest by $200 per annual. More carnage is expected for the market as the Federal Reserve is expected to hike interest rates in a couple of weeks. Thankfully, my loan amount is not too big, so the impact of the upcoming Federal Reserve interest rate hike will be minimal. For many home owners, it is prudent to choose the best mortgage loan.

Incidentally, the lock-in period for my mortgage loan will end next month, so I am looking at refinancing or repricing my outstanding mortgage loan. Lets take a look at the important factors when choosing the best mortgage loan packages in the market. You won’t want to get ripped off by the banks.

My first consideration for a mortgage loan is actually the lock-in period. I am looking at 2-3 years of lock-in period because I aim to pay off my housing debt by then using my CPF savings. For the uninitiated, the term “lock-in” is a clause which restricts you from switching to another loan package.

So wealth builders should ask themselves how long they want to be restricted by the bank. Typical lock-in period can be 1 year to as long as 5 years. So make sure you don’t sell off your property within this lock-in period. Otherwise you would incur penalty fees from the bank.

Of course, one cannot ignore the all important interest rate when it comes to selecting the most competitive home loan package. Nowadays, things can be quite complicated as banks become innovative and peg the loan packages not just to the SIBOR rates. Recently both OCBC and DBS have introduced deposit-based mortgage loan packages. Essentially, the rates are pegged to the fixed deposit rates offered by the banks, henceforth owners can get to opt for a more stable loan package as compared to one that is pegged to the SIBOR rates.

Besides this, there is also the board rates set internally by the banks. This was the package I chose three years ago. Do not confuse a board rate loan package with fixed mortgage loan. The former is not fixed and is subjected to changes by the bank whereas the latter is fixed for a period of time. This time round, I would opt for a 2-year fixed rate plus 1-year board rate package, so as to give myself more visibility on the monthly repayment.

Most homeowners who are looking at refinancing or repricing tend to overlook the legal fees involved. Depending on the loan amount, legal fees can cost a few thousand dollars. Henceforth, you should check whether the legal fees would be waived off and not just go for the cheapest mortgage deals. In addition, it is also a standard practice for banks to charge a flat administration fee which can be up to $1000. Some banks allow waiver of this administration fee if you choose to do a repricing with them.

As wealth builder, you many want to redeem your mortgage loan as early as possible and become debt free. Unless it is a HDB loan, my advice is not to do so for bank loans because early redemption usually incur heavy penalty fees, especially if you do so within the lock-in period. For a HDB loan, you can do repayment as and when you like, using cash or CPF monies. For bank loan, the term and condition varies from bank to bank but usually even if the bank allows prepayment, they would set a minimum loan amount you must maintain so that they can still earn your money. So make sure you read the term and conditions of the mortgage contract before rushing to clear your housing debt. You could unwittingly incur financial losses in the process.

In conclusion, don’t just go for the cheapest mortgage package when choosing the best mortgage loan. Good things don’t come cheap and cheap things don’t come good. Look out for the lock-in period, ask yourself whether to go for fixed or variable, consider the legal fees, administration fees and the penalty fees incurred for early redemption. In other words, make sure you know what you are paying for.

Magically yours,

SG Wealth Builder