Given the low interest environment, I imagine that most people will be looking to take out mortgage loans when buying a property, or to re-finance their existing loans. Now, how do you get the best deals? Most people will say that you have to shop around, and that’s a big part of the story, but what do you look out for after you’ve done that? There are still a lot of hidden costs involved if you know where to look in the fine print. In this post, I shall attempt to guide you through the loan-hunting process so you can get the best deal.
Step 1: Where to look?
The most obvious and easiest way may be to go to websites like Loan Guru or Smartloans that has already consolidated quotes from many banks. There, you can compare standard rates from each bank to find the best rate. However, you will not find the best deal there. If you spend some time on the phone, better deals can be found at the individual banks from time to time as they come out with loan promotions. However, these are still mass market rates. The best deals come from individual banks with whom you have a priority or private banking relationship. If you don’t have one, your friendly estate agent will have some recommendations as she would have worked with many bankers who may be able to work something out for you.
Step 2: Evaluating the deal
Fixed or floating?
So, do you choose fixed or floating rate loans? The choice is entirely yours, as they have different benefits. Fixed rate bank loans are usually only fixed for a maximum of 3 years, and then revert to a floating rate. For the borrower who wants to know exactly how much he needs to pay each month, this is the way to go. Also, if you expect the rates to shoot up within the fixed rate period, you may want to consider this. However, the downside is that fixed rates are usually higher than floating rates as the banks have to price in their time risk. As for floating rate, the benefit is that rates are transparent since the banks will quote a margin over a benchmark rate which is publicly available. This is suitable for borrowers who are comfortable with paying on-market interest rates, and those who think interest rates are staying low.
Lock-in or no lock-in?
Banks usually give a better rate if you are willing to be locked into a certain period. However, they also impose a penalty (see below) if you repay the loan within the lock-in period. I’d say that for a new purchase, go ahead and get one with a lock-in as you’re unlikely to sell within 4 years due to the SSD anyway. For a re-finance, you’ll have to evaluate the probability of you selling the property within the lock-in period.
SOR or SIBOR?
Some banks use SOR, and others use SIBOR as the base for the floating rate, so which do you choose? To be honest, there’s usually not a big difference between the two. I wouldn’t really use this as a big criteria when choosing bank loans.
Some banks offer deposit accounts that offer interest rates that match your mortgage interest (up to a certain percentage of outstanding loan). These are fantastic if you have lots of spare money to deposit, since you can offset interest payments with property income, while your deposit interest is tax-free. This is actually win-win, since the bank gets cash as additional collateral, so their risk reduces significantly. For those without the spare cash, or those who prefer to invest the cash elsewhere, this is a good-to-have but not a determining factor.
Step 3: Looking at the fine print
Now that you’ve narrowed down the bank quotes to a comparable few, it’s time to look at the fine print to find the potential costs that may be hidden in the legal mambo jumbo. These may not be very obvious even if you read the contract carefully, so you really need to know what to look out for. Here are the big ones:
Legal fee subsidy and valuation subsidy
Banks usually subsidize you for buyers’ legal fees up to a certain limit, usually something like 0.4% of loan amount up to $2,000. Negotiate with your lawyer to keep within the limit. Alternatively, you can ask your banker to raise the limit. Banks also usually pay for the valuation of the property. However, they also have a clawback clause, which states that if the loan is repaid within 3 years of disbursement, you have to repay the 2 subsidies in full.
Repayment within lock-in period
If your loan has a lock-in period, you may be required to pay a penalty if you pay back the loan within the period. Most banks will put a penalty of 1.5% of outstanding amount, which can come up to quite a hefty amount.
Notice period on repayment
Most banks will require 1 month’s notice of partial repayment and 3 months’ notice of full repayment. This means that you will have to give that amount of notice if you wanted to repay the loan. If you give less notice than that, you may have to pay interest in lieu of notice.
Repayment on a non-reset date (The sneaky one)
While the previous 3 are quite obvious, this is the one that usually gets them. What most banks will put in their floating rate loan document is that repayment has to be on a reset date i.e. when your interest rate is matched to benchmark rates. For example, if your floating rate loan is based on 3-month SIBOR, then your interest rate will be reset every 3 months. If you don’t time your repayment on these specific dates, you may be liable to pay a penalty of up to 1.5%.
By spending a little time and effort on looking for the best available loans, you can shave off quite a bit from your monthly payments. Looking at the fine print carefully will help you to reduce any unnecessary costs in the repayment of the loans. It may be a little tedious, but definitely well-worth the effort!!