Often enough, we have people asking 'What is the best home loan rate now?'. When choosing a home loan package offered by banks, it may not be as straight forward. By focusing only on rates, you may miss considering other important aspects of your home loan. A loan package that is the best for one, may not be so ideal for another. How do you know which package suit you most? Here we look at the factors to consider when choosing a home loan package.
Type of Loan Packages
First thing to consider is whether to go for fixed rate or floating rate. At times, the choice between fixed rate and floating rate can be a tough one. It involves the assessment of the current interest rate gap between the fixed rate and floating rate and your interest rate outlook. It also depends on your risk appetite whether you can accept volatility. Most importantly, it depends on your repayment ability if floating rate rises more than anticipated
Legal Subsidy / Cash Rebate
It is a common practice that banks offer subsidy or cash rebate for refinancing when the loan amount meets certain minimum criteria. This benefit is significant as it can partially or fully cover your refinancing costs which include legal fee and valuation fee. When comparing refinancing options, you should look at the overall savings which should take into consideration all the costs and benefits on top of the interest savings.
Interest Rate and Loan Disbursement Timing
When checking on loan rates, knowing the rate for first year is not good enough since your loan does not exist only for one year. It is meaningful to know the rates for the second and third year as well. To some, even the thereafter rate is important. For property under construction, as the loan is progressively disbursed over a few years, having the lowest first year rate does not necessary translate to more interest saving whe the bulk of the loan is disbursed only in the third year.
Are you looking at short term (next 2 to 3 years) or longer term for this loan contract? Some prefer to review their loans every 2 to 3 years and refinance their loans when there are interest savings. Whilst others who are not actively managing their loan may prefer to take a longer-term view when choosing their package.
Your Plan for the Property / Mortgage
What you plan to do for the property or loan in the next few years matters when choosing a loan package. You may be planning to make lumpsum prepayment as and when or periodically. It will be most useful to have a loan package that allows prepayment without any penalty fee charged by the bank during lock-in period. Or you may be planning to sell your property in the near future. As timing for sale can be uncertain, you may consider loan packages that do not incur penalty fee upon sale of property or go for package with no lock-in period.
Banks generally offer more appealing packages for higher loan amount. Depending on the circumstances and timing, you may be eligible for better offerings by applying for a slightly higher loan. This is one reason why it is good to compare the loan packages offered by different banks. A mortgage broker will be able to do that for you, saving you the time and trouble.
Another thing to note, as your loan balance get smaller, it may be more costly to refinance your loan. Some banks may not allow you to switch to another package or make partial prepayment when the loan size drops below a minimum loan amount. Therefore, before your loan balance drops below $200k for HDB flat or $400k for private property, you may want to choose a bank package that can last till maturity.
Some banks offer better rates if you bring in funds to place with the banks. This can be crucial as you can compare and weigh your options for both your deposit and loan.
Given the multiple factors to consider when choosing a bank loan package, it is therefore an advantage if you can have an experienced mortgage specialist to help you iron out your requirement and do the interest calculations and comparison for you.
To round it up, the best home loan package is the one that gives you the most savings and at the same time best meet your objectives.
With better understanding, hope you will find your best loan package in no time.