TYPES OF MORTGAGES
By www.PropertyBUYER.com.sg
09 Nov 2008
The numbers stated herein are for illustration purposes only.
Fixed Rate Packages: -
This is the most traditional package. Home owners have certainty over future payment amounts. Fixed rate packages are often discounted off from a “Board Rate” or “housing loan rate” or some other terminology introduced by the bank. Fixed rate loans may be offered for 1 year, 2 years or longer depending on the prevailing packages that banks offer.
For example, a bank may have a “board rate” of 5% while they can offer a housing loan to you at 3%. This simply means that the bank offers you a loan of (Board rate – 2%)
Staggered Fixed Rate Packages
Often Banks would try to induce customers to sign-on to a package with a cheap entry point, but the bank would typically make their money back in the later years with more expensive interest rates. The function of increasing interest rates in later years plays 2 functions, 1st as a means to increase profitability, 2nd as a means to reduce the risks as banks undertake risks in guaranteeing fixed rates.
For example: -
• Year 1 = “Board Rate 5% – 2%” = 3% (fixed for 1 year)
• Year 2 = “Board Rate 5% - 1.5%” = 3.5% (fixed for 1 year)
• Year 3 = “Board Rate 5% - 1%” = 4% (fixed for 1 year)
* Year 4 onwards = "Board Rate" = ???% (Prevailing Board Rate at the 4th year)
Depending on the bank, the bank may specify that the rate is Board Rate - 2%, board rate - 1.5%, etc, at the point of issuing the offer, however the Board Rate is only used as a reference and serves no purpose other than to build into the document the "Board Rate" because on the 4th year, the interest rates reverts to "BOARD RATE".
Other banks may completely omit mention of the board rates if their later years reverts to a SIBOR/SOR + Margin rate.
Variable Rate Packages
Variable rate packages are often pegged to a Bank’s “Board rate” or “Housing Rate” or any similar terminology.
For example: -
• Year 1 = “Board Rate 5% - 2.5%” = 2.5% (not fixed)
A bank may at it’s discretion change the “Board Rate” based on it’s own calculation of positive or negative spread within a basket of "loans" pegged to a "Board Rate". Variable rates tend to be cheaper than Fixed rate loans because the bank has the ability to change the rates at any time, thereby reducing their risks. The risks of fluctuation interest rates is passed on to the consumer.
As there were previously some grievances against banks that raise their “Board Rates”. The complaints leveled at banks were that they are not transparent enough as to when to raise the rates. Variable packages which offered a SIBOR or SOR pegged rates become popular.
SIBOR/SOR PEGGED VARIABLE PACKAGES
SIBOR = Singapore Interbank Offered Rate
SOR = Swap offered Rate (SOR is the bank's cost of funds)
What is 1-month Sibor, 3-months Sibor, 6-months Sibor and so on?
These are Fixed deposit rates that the banks offer other banks within the Association of Banks in Singapore (ABS).
Does the rate vary every month? Every 3 months? Every 6 months?
The rates vary daily. The rates changes based on supply and demand of funds available for lending at any point in time within the interbank market. Once a bank takes up a loan, for example SIBOR (1 month) at 1.25%, it is equivalent in lay-man's term to us borrowing a loan that needs to be repayed in 1 month, the interest rate is fixed at 1.25% for 1 month.
So if I sign up to a SIBOR (1 month) for my Home Loan, what does this mean?
For example, your loan is S$1m, when you sign up for a Sibor (1 month) loan for your mortgage, the bank will go to the interbank market to borrow S$1m at the point of disbursement of funds or slightly just before that. If on the day of the disbursement, the rate is 1.29% and the bank charges SIBOR (1 month) + 0.7%, the bank will charge you 1.99% for that 1 month.
Your loan interest rates will be Re-priced every month!
SIBOR/SOR pegged variable packages gives the home owner the transparency. Banks simply offer a “SIBOR + Bank Margin” package.
However there are the 1-month SIBOR rate, the 3-month SIBOR rate and 1-year SIBOR rate packages as well as the equivalent SOR packages.
Example: -
• SIBOR + 0.75%
1-month SIBOR is re-priced every 1 month while a 3-month SIBOR is re-priced every 3 months. This means, your loan repayment quantum changes every month or every 3-months depending on your choice of the peg.
This types of loans are transparent but highly volatile. Because the bank undertakes very little risk, it is usually able to offer the cheapest loan out of the many different possibilities of loans out there.
FIXED AND VARIABLE MIXES
Some banks now offer a variety of Fixed and Variable loans where the home owner is able to specify the percentage of loan to be fixed and variable.
VARIABLE PACKAGE LINKED TO A CURRENT ACCOUNT
This type of mortgage is most useful to businesspeople. They allow a home owner to offset their outstanding loan amount with money deposited in a designated current account linked to the mortgage. This is called Interest offset account.
Example: -
• Mortgage amount for Home is S$800,000.
• But the Home Owner is cash rich and has an emergency fund of S$300,000 which he/she doesn’t need to use, he/she can leave it in the designated account (which he/she can withdraw at anytime).
• Outstanding Mortgage amount = Mortgage amount – Account Balance
• Interest rate = 2%, that means interest cost is S$16,000 (per year) for S$800,000.
• But since the home owner has S$300,000 which he/she doesn’t need to use yet, he/she leaves this S$300,000 in the designated account. The outstanding loan amount is S$500,000, and therefore the interest cost is reduced from S$16,000 --> S$10,000. A saving of S$6,000 while still retaining the financial flexibility.
• Interest rate payment is based on prevailing outstanding balance.
DRAWING MONEY FROM YOUR HOUSE (TERM LOANS)
Most banks will lend you up to 80% and sometimes even 90% of the valuation of your home. Some home owners will suddenly find that their home valuation has gone up. Consequently, the banks are willing to lend you more money.
Example: -
Previous valuation of your property = S$800,000
Mortgage Loan amount @ 80% = S$640,000
Outstanding loan = S$500,000 (An illustration: incl CPF used, eg. 100K)
New valuation of your property = S$1,200,000
Possible Loan amount @ 80% = S$ 960,000
Net Additional Cash borrowings = S$ 960,000 – S$500,000 = S$460,000
For example the interest rate is 2.5%. This is considered very low interest rates because unsecured loans typically cost > 10% in currently.
This money if used carefully is considered the lowest possible rate, which you can use for purchasing another property, pay for your children’s education or travel the world or start a business. Any lower interest rates, you will have to borrow from your parents.
The result of this package is: -
* Mortgage will be S$400,000
* Term Loan will be S$460,000
INTEREST PAYMENT ONLY PACKAGES
Uses either Fixed or float, however the home owner pays only interests and does not pay down the principle. This type of packages are suitable for people who needs the extra cashflow or for investors looking for maximum leverage to boost Return on Invested Capital. This can be a risky proposition in cash flow becomes an issue.
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SUPER COMBO PACKAGES
This option involves a Bridging scenario. A home owner staying in his/her existing place (Property A) buying another property (Property B) while trying to sell his existing property.
Property A and Property B involved
* Refinance of Property A to Sibor/SOR package with No redemption penalty, in anticipating of a sale.
* Equity Loan (A term loan tied to property A and B) from Property A to pay for part of downpayment of Property B.
* Property B using Equity Loan from Property A was able to stick within the Loan to valuation (LTV) of smaller or equal 80% and hence enjoys cheaper interest rates.
* Property B borrows 80%, of which 40% is Fixed rates for 3 years and 40% is Sibor/Sor based Floating rate.
* There is also an interest offset current account (Can offset interest against the Variable rate) with a Built-in Over-draft facility.
We have seen more complex cases and we are happy to help you with it.
PENALTY AND LOCK-IN PERIOD
Most banks want to lock you in from typically between 2 years to 5 years. This is because many banks use a step-up interest method where the later year interest rates are higher. Consequently the penalties of breaking the loan at Year 1 may be higher than Year 2.
Example: -
Penalty for full redemption of Loan within year 1 = 2% of outstanding loan amount.
Penalty for full redemption of Loan before year 2 = 1.5% of outstanding loan amount.
LEGAL FEE CLAWBACK
Banks typically offer you legal fee subsidy of 0.4% of loan amount subject to maximum of S$4,000 (for very big loans), but typically S$2,000 (some banks more, some less). In the case of an early redemption (Usually within 3 years), the house owner will be required to pay-back the full legal fees.
Many Property Buyers DO NOT know that they can choose their lawyers. Sometimes they used the given panel of conveyancing lawyers, the rates can be higher. An example, most Condominiums within S$1.5 to S$2m price range, their legal fees should be no more than S$2,000 to S$2,300. Any more, you are over-paying and it will cost you when you refinance.
HOME VALUATON FEE CLAWBACK
Some banks offer free valuation of your property as part of their mortgage loan offers. Other banks offer free valuation of your property provided that you do not redeem your loan within a specified period (Usually 2 years or 3 years). You are most likely required to reimburse the bank at the point of Loan redemption.
The valuation typically cost between S$150 to S$500 for apartments and condominiums, but can cost between of S$1000 to S$10,000 in landed property depending on the land size, property built-up size and terrain.
Some banks give generous VALUATION SUBSIDY, make sure that in case you have a CLAW BACK Clause, push the banks to use your own approved Valuer, because this ultimately comes out from your pocket.
FIRE INSURANCE
There is usually no claw back for fire insurance beyond 1 year of the loan. But it depends on the banks.
MORTGAGE INSURANCE
Most banks do not provide Mortgage insurance in a Home Loan Finance or refinance deal. However some banks have started to cross-sell products from different divisions or re-sell products by insurance companies by putting in a form together with your Home loan package. Mortgage insurance is usually preferred for Joint-Tenancy ownerships. Because in the unfortunate event of the mortality of 1 partner, the partner takes over the assets, but the joint-tenancy partner (Usually a spouse) also take over the debt servicing, if any.
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