If you wish to purchase a house and you are thinking of applying for a home loan to buy it, then there are various aspects of the loan that you will have to take into consideration before you apply. Today, many banks in Singapore are offering competitive home loan packages. Some of these packages offer fixed rates while others offer floating rates pegged to certain parameters. The home loan rate in Singapore varies depending on market conditions, so you must lock-in your home loan rate if you can once you have found the best deal. Read on to find out other ways to choose the best loan.
Look at Different Packages
Just as you would do your research before you purchase a car, you must put the effort to find out the best home loan package available for your specific profile and make sure you do not put unnecessary pressure on your finances. Talk to different lenders as it will help you know more about bank home loan packages. By doing so, you will have a better chance of finding a loan option that is a perfect fit for you.
Decide Between a Bank Loan Package and an HDB Loan
Close to 80% of the homes in Singapore are HDB flats. If you are thinking of purchasing an HDB flat, you can either apply for an HDB loan or you can take a bank loan. To get an HDB loan, you will have to fulfil certain criteria. In case you are eligible, you will be able to enjoy a stable rate of interest. However, people often fail to qualify and they end up taking a bank loan. A bank loan has its own benefits, but comes with its own set of drawbacks as well. For example, banks offer lower interest rates in comparison to HDB loans. However, this rate may fluctuate and you cannot go back to a HDB loan.
Determine the Duration of Your Loan
The duration of your loan can make a big difference when it comes to how much you will pay in total over the course of your tenure. You may be tempted to opt for a loan with a long duration as you may think that the monthly repayments will be inexpensive. However, you will often find that by the end of the tenure you end up paying more by way of interest because interest rates are usually high for longer loan repayment durations.
For example, if you apply for a loan of S$250,000 at a rate of 2.5% p.a. over a period of 10 years, the monthly repayment will be S$2,356, with a total interest of S$32,780. On the other hand, if you extend the tenure to 30 years, the monthly repayment will come down to S$988. However, the interest will go up to S$105,680, which is significantly more than what you pay for a 10-year period. This is only for illustrative purposes. Actual figures may vary.
Break Down the Fees that You Have to Pay
List down the various costs that you can and cannot control. Make sure you take advantage of the closing costs that your lender may sponsor. Do not forget to ask about more subsidies. There are other costs as well that you may avoid and thereby save a substantial sum. Find out about the costs that you can take control of and decide what you have to do with them. For example, most banks will charge a fee if you make an early repayment. Find out whether paying this fee will help you save more by avoiding the interest payment.
Determine Whether You Need a Floating Interest Rate or a Fixed Interest Rate
Most packages provided by banks in Singapore allow proprietors to pick between floating or fixed interest rates. You must understand the difference between the two and identify the one that works best for you. If you opt for a fixed rate, you may be charged a higher rate in comparison to floating rates. If you are not averse to taking a risk, you can opt for a floating rate pegged to either Singapore Swap Offer Rate (SOR) or Singapore Interbank Offered Rates (SIBOR).
Determine Whether You Need a 1-Month Floating Rate or a 3-Month Floating Rate
Whether it is SOR or SIBOR, banks will let you pick your desired benchmark rates that will either be based on a 3-month or 1-month average. 1-month averages are often more unpredictable in comparison to a 3-month average.
Carefully Consider Your Lock-in Period
The amount of time that you will have to mandatorily stay with your home loan is known as the lock-in period. Generally, the lock-in period varies from 1 to 3 years. However, you will find home loan packages that offer a lock-in period of up to 5 years and there are packages with no lock-in period at all. If you wish to discontinue your home loan during the lock-in period, you will have to pay a penalty on the outstanding loan. To avoid paying this unnecessary charge, make sure you carefully consider your lock-in period. To ensure that you do not take any wrong step and make better decisions while choosing a home loan, do consider the points mentioned above and use all the financial tools available.