Choose a suitable loan

Right from the start, make an informed choice – switching to another package too early, that is during the lock-in period (usually the first 2 to 5 years of the loan) will incur a penalty of 0.5-1.5% of the redeemed loan amount. Even if there is no lock-in period, you may still incur closing costs like legal fees. In other words, do your homework and research all the home loan packages available in the market. If that is too tedious, simply turn to a mortgage consultant, who will provide free advice - click here. If you select the right mortgage, this can translate into substantial interest savings. For example, if you have substantial idle cash set aside for contingencies, you can consider an interest-offset loan, instead of the conventional fixed or floating (variable) rate loan. We illustrate the interest-savings you can make from this choice. When choosing between loan types, another key consideration is the interest rate environment. During a low interest rate environment, a floating rate loan usually incurs lower interest payment compared to a fixed rate loan. But the situation may change when rates swing upward. To prevent too high a hike, opt for a floating rate loan that comes with an interest rate cap – a few banks may offer this occasionally. To learn more about selecting an ideal loan, read our previous articles: “How Do I Compare Home Loans in Singapore?”. But as each individual's financial situation and needs are unique, it will be best to speak to a mortgage consultant.

Rest

Rest is the frequency in which the outstanding loan amount is calculated. There are 4 types of rest: daily, monthly, quarterly or annual. Most home loans in Singapore follow a monthly rest, a few are daily; while quarterly and annual are rare. To obtain interest saving, you should opt for a shorter rest. This is because the monthly interest payable is calculated based on the principle outstanding from the last time the bank's calculated it. For example,

• Loan Quantum = S$1 million
• Loan Tenure = 30 years
• Year 1 Interest Rate = 1.2% p.a.
• Monthly Interest Rate = 0.1%

Table 1

	Interest for Annual-reducing Loan (S$)	Interest for Monthly-reducing Loan (S$)
1st Month	1,000	1,000
2nd Month	1,000	997.69
.	.	.
12th Month	1,000	974.47
Total Annul Interest (S$)	12,000	11,847.09

  From Table 1, we can see that the total interest is relatively lower for a loan with a monthly rest. Because the principle is repaid each month, and the monthly interest computed is based on the monthly outstanding principle, not the annual. Although loan instalments are monthly, a daily-reducing loan will still offer slightly lower interest payment compared to a monthly-reducing. It also has the advantage of lowering the interest payable almost immediately after partial prepayment is made. For instance, with a monthly rest that reviews the outstanding balance on the 1st, and if you were to make a prepayment on the 15th you would have to wait till the 1st of the next month before your balance is adjusted. Therefore, all else being equal, always try to select a loan with a lower rest.

Partial prepayment

If you happen to have extra cash on hand, and no lucrative investment to spend it on, use it towards paying down your home loan. This will reduce your principle and hence interest chargeable. However avoid repayment during the lock-in period; otherwise you may face a penalty which can outweigh the interest saving. The below illustrates. Bank Y Fixed-rate Loan

Period	Interest Rate (p.a.)
First Year	1.15%
Second Year	1.35%
Third Year	1.45%
Fourth Year Onwards	0.50 % below the Board Rate

 

• Repayment Amount = S$20,000
• Prepayment Penalty = 1.5%
• Penalty Charge = S$300

The interest computation in Table 1 is based on a monthly-reducing loan (monthly rest).

Table 2

	Outstanding Loan Amount = S$1 million	Outstanding Loan Amount (after S$20,000 repayment in Year 2) = S$980,000	Interest Saving (S$)
Year 2 Total Annual Interest (S$)	13,324.91	13,058.41	266.50
Year 3 Total Annual Interest (S$)	13,900.83	13,622.82	278.02

  Thus, if the lock-in period expires at the end of Year 2, you will be worse off by S$33.50 (300 – 266.50). However, if the lock in ends at the end of Year 3, you will be able to have interest saving of S$244.52 [(266.50 + 278.02) – 300]. We can infer that prepayment if made during the lock-in period should be done earlier rather than later. The other two factors that determine if it is worthwhile to make prepayment during the lock in are the interest rate and the penalty rate.

Refinancing or repricing (conversion)

Refinancing occurs when you switch to a loan package with a different bank. Repricing (conversion) is when you switch to a different package with the same bank. Do so once every few years, particularly after the lock-in period, to see if there is a better loan package around. Moreover, after the first few years of the loan, the spread or interest rates are almost always revised upwards. This is true for whichever loan types. Furthermore, banks may introduce new loan features from time to time; like interest rate cap, rates pegged to the average of both SIBOR and SOR or set to the rate of the CPF Ordinary Account, options between fixed or floating rate after the initial few years of the loan, and etc. Who knows some of the features may suit your needs perfectly? Refer to “A Guide to Housing Refinancing in Singapore” for more advice about refinancing.

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About Property Buyer http://www.PropertyBuyer.com.sg/mortgage We are a research-focused Singapore mortgage consultancy which helps you compare Singapore home loans either for new loans or refinancing. We use loan reports from Singapore's best loan analysis system (exclusive to us) at http://www.icompareloan.com/consultant/ to serve our customers. Our services are completely FREE to you as the banks pay us a referral fee upon loan disbursement. SMS: (65) 9782 8606 Email: loans@PropertyBuyer.com.sg