What is the penalty period of the loan package? For instance if you're likely to sell this property within the next 2 years, you might want to choose a Housing Loan package with a short lock-in period of say, 1 year or no lock-in period at all.

What is the chance of selling the property before the property receives Temporary Occupation Permit (TOP) or before the loan is fully disbursed? If you may sell off the property before the loan is fully disbursed, you might want to look for a Housing Loan package with a lower cancellation fee. Low cancellation fee is a especially important feature to property speculators who typically sell the property within a short holding period.

What is your view on Interest Rate trend in the next 2 years?

If you're of the view that interest rates have peaked and are unlikely to go up in the next 2 years and may even drop, you may want to choose a Floating Rate Housing Loan package rather than a Fixed Rate Housing Loan package. You can also consider choosing a package whereby interest rates are tied to Swap Offer rate or Inter-bank Offer Rate, whereby any drop in interest rates would be translated into lower interest rates on your Housing Loan. Because sometimes even when inter-bank offer rates drop, bank might not adjust the interest rates on their Housing Loan downwards.

Any flexibility on partial repayment?

Some packages impose penalty charges on any partial repayment within the lock-in period. If you're likely to make partial repayment in the next 2 years, you may want to choose a package that allows partial repayment without penalty fee.

What is the best duration for home loan?

Typically, the longer the loan period, the more interest you end up paying. As a general guide, do not stretch loan period to more than 25 years. For loan period that stretches beyond 25 years, say 35 years, you would end up paying much more interest compared to a loan of 25 years.

Let us illustrate with an example, whereby loan amount is S$300,000 and average annual interest rate of 4% on the Housing Loan:

In this example, if the loan period is 20 years, monthly instalment is S$1,817.94. On the other hand, if the loan period is stretched to 25 years, monthly instalment is reduced by $234.43 to $1,583.51, and total interest paid increased by about $42,240.93. However, when loan period is stretched a further 10 years to 35 years, loan instalment is only reduced by S$255.19 only, while total interest paid increased by $75,600.27.

Loan Period 20 25 30 35

Monthly instalment $1,817.94 $1,583.51 $1,432.25 $1,328.32

Total interest over loan period $138,529.77 $177,770.70 $218,895.28 $253,370.97

Another way to plan the duration of a Home Loan is not to stretch loan period beyond your retirement age. For instance, if you plan to retire at age 60, you should not be taking a loan period that stretches till you're age 65 or 70.

What is the difference in interest rates for mortgages for property under construction vs completed property?

Currently, there is not much difference in interest rates for Housing Loans whether for completed property vis-a-vis property under construction. In fact, some banks offer the same packages whether for completed or properties under construction.

What are the refinancing penalities and costs, and under what circumstances should a borrower consider refinancing?

If your Home Loan is out of the lock-in period, the only cost of refinancing is only possibly legal cost of refinancing. Typically, Banks provide legal subsidy. Thus, depending on the loan amount outstanding, the full legal cost of refinancing maybe fully subsidized by bank and cost of refinancing can be zero!

If your Home Loan is still within the lock-in period, we will help you to calculate whether the interest savings by refinancing into another Housing Loan package which offers lower interest rates is more than enough to offset cost of refinancing, which may include repayment penalty and refund of legal subsidy.

The interest savings you enjoy on refinancing can work out to a tidy sum of tens of thousands of dollars. Thus, it really pays to choose a Home Loan right. With the above tips we share on choosing a Home Loan, you are almost assured of choosing the right Housing Loan package that suits your needs and helps you save money.

Copyright (c) 2007 Dennis Ng