Getting a loan is a daunting task since you’ll want the perfect one to reduce the amount of financial burden you have to carry. Yet it’s widely said that there isn’t a “best” loan out there; it will have to depend on your preferences and lifestyle. To help you make the optimal decision, here are 5 things you should consider.
1. What Loans Are You Eligible For?
To get things rolling, the first thing you’ll have to know is which loan you’re eligible for. Like most other loans, this will depend on your property type, income, age, citizenship and credit score.
For instance, the HDB Housing Loan, possibly the most popular home loan in Singapore, is available to Singapore citizens who earn a monthly salary of not more than S$6,000 (for singles) OR have a gross monthly household income of not more than S$12,000 (for families). If you don’t meet these requirements or are hoping to get a loan for a private property, then you’ll have to go for bank loans, which normally have stricter penalties, less strict eligibility and similar or lower interest rates.
Also, take note of the Total Debt Servicing Ratio (TSDR), which was introduced by the government in 2013. To put it simply, your TSDR is your monthly debt obligations compared to your monthly income and it shouldn’t exceed 60 per cent. This total debt includes all kinds of debt, from mortgage to study loans.
2. Loan Term
Imagine paying a loan for over 50 years. That surely sounds like a long road to go! However, don’t look at loans so simplistically.
Loan term refers to the duration of time that you take to completely repay the loan, which in general takes 10 to 40 years. To help you with your decision, know that the longer your loan term, the smaller the monthly payment you need to make. But the downside is that the total amount you will eventually pay is higher. Most banks also cap the maximum age at 65. This means that if you are 50, you may only have a loan term of up to 15 years.
Hence, make sure to not just consider how long, but also how much in total you’re paying. Only you, the borrower, can make a balanced call.
3. Fixed Vs Floating Rate
Interest plays a huge part in our choice of loan. That’s why it’s important to differentiate Fixed and Floating. Fixed means the interest rates stay the same over a fixed period of the loan while floating rates change. So when do you choose fixed and when do you choose floating?
Fixed lets you plan your finances better because you’ll know the exact amount you are required to pay each month. This is crucial if you are renting the house out and using the rental to cover the monthly mortgage. In general, fixed rates are more costly than floating rates. However, floating rates are more volatile and may come out to be more expensive over a longer-term, even if they are lower during the start of the loan. Floating rates are normally linked to Singapore Interbank Offered Rate (SIBOR), which can be understood as interest rates Singapore banks are willing to lend and borrow funds at, and the Swap Offer Rate (SOR), which may be slightly more volatile as it is affected more by the USD/SGD exchange rate.
4. Other Loan Conditions
Other than the interest rate, type of rate, loan terms and type of loan, you should also consider other less tangible factors such as repricing fees, valuation subsidies, and length of the lock-in period. To avoid paying repricing fees, make sure you are okay with the interest rates, especially if they are the floating kind which may increase over the years. Make sure you are happy with the lender, be it being HDB or banks. The lender may provide additional perks such as covering or subsidizing legal fees or mortgage insurance. However, banks are likely to withdraw all these perks if you refinance within the lock-in period.
5. Don’t Be Afraid To Refinance
Say you’ve been paying the loan for 4 years and the interest rates have gone up higher than is worthwhile. Or you’ve started paying for your parents and discovered that the loan they have taken up is not compatible with your lifestyle. In such cases, you might want to consider refinancing, which simply means switching over to a new home loan package (with the same bank or another one).
This requires legal and valuation fees which may be covered by the institution providing the new loan. Of course, do this after the lock-in period to minimise the penalties. Refinancing, depending on whether the bank offerings are financially sensible for you, can mean huge savings in the long run.
Make loans work for you. Visit SRX’s Mortgages now, where our loan concierge experts will guide you through every step of the way.