Based on the enquiries we received, it seemed most often that the lowest property loan interest rates caught their eyes, followed by lock-in period. Cheap rates in the initial years are enticing but are they really to your benefit? Let’s look at two common factors to decide on the right property loan.
Most property loan packages have lower effective rates in the first 2-3 years, mainly due to the smaller spreads. In recent months, few banks have launched promotional packages with spreads that stay constant throughout the loan tenure. Let’s look at these 2 packages. This calculation is based on $800,000 loan and 30 years for private property.
The first package (let’s called it Package A) provides a spread of 0.95% on top of 3M SIBOR. The attractive part is there is no increase in the spread over the entire loan period.
The second package (package B) has increasing spread from 0.85% to 0.9% and eventually 1.25%, plus 1M SIBOR. This type of rising spreads are the typical mortgage products offered here.
Looking at the Total Interest payable in year 1-3, it is clear that you should pay lesser interest for Package B. This is due to the lower spread of 0.85% and 1M SIBOR. It get more interesting once you look at 5 years and beyond. Package A starts to show it’s benefits of having a constant 0.95% spread despite 3M SIBOR being 20% higher than 1M. Package A will continue to incur lower interests payable as the years go by.
The questions you should ask yourself is what’s your time horizon in holding onto this home and property loan? Is savings on interests payable in the initial years important than taking a long-term view that is less predictable? Do you intend to refinance to fixed rates in few years time when interests rates goes up? This leads us to the next point.
Do you know the difference between 1M, 3M & 12M Sibor?
Eligibility to Refinance
In the last announcement on TDSR by MAS, refinancing is no longer an easy process. Your debt ratio and income must fall within the current threshold of 60%. If you are holding onto a HDB mortgage, you have to tackle the 30% MSR first. If the current loan was secured with guarantors, you might not be able to refinance since guarantors must be co-borrowers too. How about a change in your family plans where the wife quits to take care of kids, hence a lower income?
These are questions and scenarios that you must consider seriously. There are risks involved since policy may change or your financial situation may take a dip. Those who had over-leveraged are still holding on, as rates remain low and prices strong. They are not facing any dilemma on refinancing (yet). For clients who think they might be affected in the future, perhaps taking a long-term view on choosing interest rates is more sound.
If you are looking to purchase, perhaps the best move is to determine your borrowing limits first. With our property loan calculator, start to evaluate the rates, interest payable and request a callback. If you are interested in switching to a package with constant spread or fixed rates, calculate the refinancing savings at FindaHomeLoan.co.
Contact us today for the best mortgage advice!