Mortgage
6 Biggest Mistakes In Choosing Home Loans In SG
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Most adults in Singapore would have to make a decision on a home loan sooner or later.
It’s one of, if not, the biggest financial decisions a person would have to make in a lifetime.
So it’s no exaggeration to say that this is a decision process that deserves your valuable time to evaluate and ponder about. In fact too many people spend too little time on it.
A reason that causes home buyers who need a new loan to close on buying a property is that there is usually a time limit factor that comes in the form of the validity dates found in the OTP.
Homeowners who seek refinancing usually have more time for research and choosing which loans to sign up to replace their existing ones. The motivating factor is usually the date when a higher interest rate on their existing mortgages kick in.
Even so, home owners have months to prepare as long as they are prudent in their financial planning.
Yet despite spending a lot of time scouring through loan packages offered by every bank and meticulously looking in every term & condition contained in their facility letters, you could still be prone to some of the biggest mistakes when choosing a home loan.
Here are some of them.
1) Inquiring with only one bank
There are many legitimate reasons for someone to only go with one bank.
It could be that it was highly recommended by a friend, that specific bank has been the only bank you have been dealing with for a long time, you simply have no time to visit more banks, or that you have inquired with many lenders but only one has responded, etc.
While there’s a chance that a bank that you have been banking for decades might provide you a special rate that general consumers would have no access to, there’s no guarantee that it would be the best rate in the market.
This is because the market for Singapore home loans is wildly competitive.
There are more than 10 residential property loan lenders and approximately 1.372m households as of 2019. Of which 78.6% of these household live in HDB flats, and a huge portion uses HDB loans to finance their properties.
In terms of units, a huge number of banks are competing for a small number of customers.
The silver lining is that real estate prices and values in SG are strong. This makes it worth competing for each property even though the number of units are small. But every customer lost also means a larger opportunity cost as each house or apartment can be highly valued.
This extremely competitive environment motivates lenders to constantly try to outdo each other while keeping an eye on their bottom lines.
As such, it is not surprising to see lenders with a smaller local presence offering housing loans that blow well-established banks out of water with their mortgage rates.
Consider that all mortgage lenders are essentially selling the same product, money. There is no difference between a dollar loaned from a bank and a dollar from another bank!
So unless you are more than willing to pay a premium to you favorite bank for having a brand name, then failing to look at the offerings available from other lenders can only be described as financial self-sabotage.
Even if you have already made up your mind about who to borrower from, the prudent thing to do is to at least check out what others are offering.
2) Going for what appears to be the cheapest home loan
Banks hire some of the brightest marketing minds in the workforce. And you can be sure that they are thinking about how to better catch the attention of prospects everyday.
A disturbing practice that has been around for years is that lenders often advertise extremely low interest rates on their products such as personal loans, credit cards, and property loans, etc.
There’s nothing wrong with it. Just like how subscription services often advertise their services are free… for the first month.
With mortgages, lenders often advertise their low interest rates for the initial years of the loan. These teaser rates can often be ridiculously low to catch the attention of borrowers.
But what property buyers and homeowners would realize later is that these teaser rates are only for the first year or two. After which, the loan reverts to a much higher rate compared to the teaser rates.
Signing on to these types of loans, which can appear to be the cheapest around, will mean that borrowers would only enjoy low rates in the first few years. They would then be on higher interest rates.
For example, here are two loan that express their interest rates for the first 3 years.
It should not require a genius mind to see that loan 2 looks more attractive than loan 1. If the decision to choose a home loan is based on this information alone, then the selection choice should be a straight forward one.
However, the true picture of both loans might look like this.
Loan 2 don’t look so good now, does it?
When you are pulled in by low teaser rates, and failed to see what’s available on the market as explained in point #1, you can make the big mistake of choosing a loan with low rates on the first year or two, then be stuck with higher rates into the future.
A banker or mortgage might then tell you that it’s all fine and that everything would be alright as you can refinance the loan in future when the higher rate kicks in.
That is really putting too much assumption in the future which no one can predict.
There are many possible reasons why refinancing might not be possible in the future.
Maybe the government introduced new policies concerning LTV and personal income with regards to refinancing. Maybe the property has depreciated. Maybe there are no loans available at that point in time to refinance to.
Going back to the example above, imagine that you have taken up loan 2 and 3 years later, the home loan rates available are 1.50%. It would make no sense to replace your 1% loan to one that charges 1.50%. Whereas if you had taken up loan 1 in the first place, you’d be paying 0.75% throughout until the end of the loan tenure.
While different people would have different preferences in how to choose loans, loan 1 would look like a more attractive deal when we look at it from a long term perspective.
Mortgages for under construction property also tend to be structured with teaser rates.
3) Planning to refi before even taking up a loan
This mistake has been briefly explained in the previous point.
But the magnitude of this mistake deserves a closer look.
For starters, there is absolutely nothing wrong with refinancing a mortgage. Thinking about it is a pragmatic approach to personal financial management that should be lauded.
But when choosing a home loan now, at this moment, it just don’t make a lot of sense to decide to refinance in a few years as we have no idea what the future holds.
For example, when you are signing up for a mobile data plan, it’s ridiculous to decide that you will move to a better and cheaper plan in the future as you have no idea what types of plans would be available in future. If you had stuck to unlimited data plans when mobile data first entered the market and refused to recontract, you’d still be on unlimited data for about $10 now. But alas! You were pulled in by the cash rebates for new smart phones.
The decision to refinance a loan that you will be taking up can affect how you compare different loan packages.
You’d be inclined to look at lock-in periods, cancellation fees, redemption penalties, legal clawback, etc. All of which don’t matter if you have a long term perspective on the mortgage.
When we consider that the typical lockin period for completed property loans is 2 years and legal clawback commonly being 3 years, why would anyone think about refinancing a loan within that time period when we are talking about a mortgage that stretches 20 to 30 years.
Moreover, if you can secure low and attractive thereafter rates now, why take the risk of predicting that these rates would be lower in the future which you can switch to?
The gist of all these is that you should be assessing a loan as it is now. Avoid thinking about the future loan that you want to replace the loan which you have not even signed on to.
This is a good example of being too clever for your own good.
4) Assuming things are non-negotiable
Many people have the impression that bank terms are fixed and cannot be negotiated against.
For the most part, this is true.
But sometimes, lenders can have flexible internal policies that can approve changes to certain terms and conditions. The reason for doing so might be due to promotions, competition, or just being in a good charitable mood, etc.
A lot of this depends on timing.
If you happen to be exploring housing loan options when a bank in in such a giving mood, then all you might need to do to receive more favouroble interest rate that are not publicly published is to ask.
It goes without saying that as a business, a lender would want borrowers to take up a debt with as high an interest rate as possible. So if a customer don’t ask for lower rates, a banker might not offer it simply because the borrower did not ask for it. This is even though he/she knows that the rates can go lower.
This is also why deviated rates is such a common phrase used by mortgage professionals.
The lesson here is that if you want better terms, there is no harm asking for them. Don’t assume that it would be an impossible task. You might just get lucky.
5) Not putting enough trust in the banker
It’s understandable.
Bankers can sometimes give people the impression that they are out to fleece every prospect that walks through the door.
But the overwhelming majority of them are there to help you.
They might ask for extra documents or even ask you weird questions regarding your income and property, but their main objective is not to find your faults. That is the job of the credit department.
Mortgage specialists are there to present your case in the best light so that it has the highest chance of approval and obtaining more favourable terms.
When they ask for more income documents for example, it’s not that they “look you no up”. It’s because their experience foresees problems and it tells them that more documents would be able to assist your mortgage application.
Nobody is trying to find faults with your documents and report you to the authorities. They are just doing their jobs of putting the case forward in the best way possible.
Even if they are promoting excessively high interest rates, they want to get your case approved. Only then can they try to obtain deviated rates for your consideration.
Bankers are motivated to obtain approvals and acquire new customers. And they know that customers would only accept their loans if they offer the best deals. It would be strange if their actions show otherwise.
6) Taking up board rates
There are typically 3 types of interest rate structures that mortgage lenders sell to consumers.
- Floating rates
- Fixed rates
- Board rates
Floating rates are those types of home loan packages with SIBOR or SOR (among others) with interest rates depending on the index rate. Thus, changes over time. Fixed deposit rate mortgages are also considered floating rate loans.
Fixed rates are loans with an interest rate that is fixed and doesn’t change.
Board rate loans are home loans with interest rates with in index and a spread. However the index used is one that is determined by the internal policies drafted by the lender itself. For this reason they are also commonly known as internal board rate.
They can go by various different names.
But what remains the same is that the lending bank determines what the board rate is with little transparency on how they are calculated.
This means that when you sign up for a board rate home loan, you would pretty much be at the mercy of the lender.
Like teaser rate loans mentioned in point #2, board rate loans can often be enticing with very low initial interest rates. Possibly with a low fixed rate or discounted board rate. But once the full board rates kicks in, they are usually higher than the mortgage rates available in the open market. Which would then take you back to point #3.
A reason why borrowers can end up on these types of loans is that they have no other options available. It could be that other banks offering better deals have all declined their applications. So the only approval options available to choose from are board rate mortgages.
So if you are able to obtain other fixed rate or floating rate home loans, you should give board rates a miss… unless they are clearly and overwhelmingly more attractive than others.
To wrap this up, remember that choosing home loans can have a drastic impact on your personal financing.
Even if you have the cash to burn, why pay more than you have to?
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