FinanceHow You Can Compare Home Loans And Get The Best Deal
- by Ryan J Ong
- June 4, 2020
- 9 min read
Now that you understand the difference between SIBOR, Board Rate, and Fixed Deposit home loans – it’s time to put all the last few sessions to good use.
One of the worst things you can do is go straight to the nearest bank, and get your home loan from “wherever”. Yes, we know that hearing about loans is not exactly prime entertainment; and speed does matter. But the truth is, it doesn’t take long to compare loan packages and find the better deal; and it’s a small investment of time, for something that’s going to occupy you for the next 25 to 30 years.
Here’s a painless way to compare them:
What’s the main differentiation between home loans?
Almost nothing except the interest rates. Home loans are not a highly differentiated product: if you pick a home loan that costs more, your only “bonus” is that you get to pay more money.
The reason the rates are different is simple: banks have a quota on how much they want to lend. As they near the end of that quota, they tend to raise the interest rate. There are a couple of other exceptions, such as if a bank purposely lowers its rate to get more market share (a promotional event); but for the most part this is all there is to it.
As such, the key to finding the cheapest home loan is to know which banks are – at the time of application – the cheapest ones.
That’s easier said than done
The problem is that the “cheapest bank” changes all the time. Bank X may be the cheapest bank this month, but be one of the most expensive the next. Right now, Singapore has five incorporated local banks, and around 28 foreign banks that offer home loans.
Each of those banks may have multiple home loan packages, so there can be as many as 100+ options on the market at any one time. Trying to call each bank and compare the options yourself is a tremendously time-consuming exercise and…here’s the kicker…probably futile.
Because the best interest rates are sometimes not even advertised to the public. We’ll explain more of this below.
So how do you compare to see which home loan is best?
- Look for help outside the mortgage bankers themselves
- Don’t assume comparison sites show you all the offers
- Subtle differences in practices can cost a lot of money
- Look for features like lock-ins and free repricing
- Think beyond the first few years
1. Look for help outside the mortgage bankers themselves
A mortgage banker works for a specific bank. They’re obliged to recommend only the loans from their employer (unless they want to get fired!) So the mortgage banker working for Bank X simply cannot tell you that Bank Y is much cheaper.
This is why it’s best to look for independent mortgage brokers, who can help you compare loans from multiple banks. These brokers don’t usually charge you anything; they rely on commissions from the bank when you get your home loan.
(If you’re worried that a mortgage broker will lie for a bigger commission, you can try talking to more than one broker. The advice that you’re hearing should broadly coincide).
2. Don’t assume comparison sites show you all the offers
There are plenty of home loan comparison sites these days that all purport to show you the cheapest loan (although sometimes, you might spot big discrepancies between them).
First, don’t assume that all comparison sites work with every single bank. Some comparison sites only show you offers from the banks that they currently work with (e.g. they may only work with six or seven banks, and offer loan packages only from their partners).
Second, remember we said earlier that some of the best rates aren’t advertised to the public?
That happens because sometimes, independent mortgage brokers are able to pull strings. This includes negotiating with a mortgage banker to lower said banker’s commission on the home loan, and give you a better deal.
So don’t be too quick to click. Shop around a bit more to confirm what you’re seeing on the site; or contact us at Stacked to be sure. We can put you in touch with expert brokers, who can advise you directly.
3. Subtle differences in practices can cost a lot of money
One example of this is in the law firm the bank wants to use. Sometimes, a mortgage banker will ask you to use a law firm that’s only on the board of that particular bank, and not any other.
If you go ahead with this, it can make refinancing more expensive later. This is because switching your loan to another bank will require a new law firm to take over (the one you’re using is only recognised by your current bank). This could incur another $2,500 to $3,000 in conveyancing fees.
Some banks may have clawback clauses as part of their usual policy. This means that, when you try to refinance, you’re supposed to pay back certain subsidies the bank has given you, such as subsidised conveyancing fees, paying your fire insurance, etc.
In some cases, you may not even realise you had those subsidies if you skipped the fine print. It can be a bit of a shocker when you try to refinance.
Take note of:
- Which law firm you’re using (you can use your own law firm, as long as it’s on the bank’s board; and there are some firms that are on every bank’s board. Ask a mortgage broker).
- What subsidies you’re given, and the subsequent clawback clauses
- Exactly how your loan amortisation and interest work (Two banks can charge the same interest rate but end up with different numbers, based on how they apply the interest)
- Breakage fees (e.g. if you have a 3M SIBOR loan that’s meant to be revised every quarter, but your refinance in the middle of the quarter, how much will you have to pay for that?)
- The prepayment penalties, in case you ever need to repay your loan earlier than expected (e.g. if you sell the property and want to pay off the remaining loan).
Make sure you’re happy with the above before proceeding.
4. Look for features like lock-ins and free repricing
Some interesting features that can improve a home loan option are:
- A lock-in period. This is a period of usually three to five years, during which you can’t refinance; doing so will incur a penalty of around 1.5 per cent of the undisbursed loan amount.
And yes, we’re saying that such a lock-in can sometimes improve a home loan option. This is because home loans with lock-ins tend to be a bit cheaper than their more flexible counterparts. So if you’re not intending to refinance for a few years anyway, the lock-in is a negligible disadvantage.
(Conversely, if you do see yourself refinancing or selling the property soon, then avoid the lock-in feature).
- Contribution to your savings accounts. Some banks have “bonus tiers” for their savings accounts; taking a home loan from the same bank can result in a higher interest rate on your savings. You’ll need to check the terms and conditions of your savings account for this, but it can be a nice way to net a few extra bucks.
- Interest offset options. These aren’t as big a deal as they used to be, due to how low interest rates have been in Singapore for over a decade. Anyhow, this option often lets you offset your home loan interest, by giving up the same interest on a savings account or fixed deposit that you open with the bank (exact terms may differ between banks).
- Free repricing. A free repricing means that, if the bank later launches a cheaper loan package, you can switch to that package from the same bank at no cost. Some home loans come with one or two free repricing options (under normal circumstances, repricing comes with administrative fees that can be $500 to $800).
A free repricing is sometimes a much cheaper option than refinancing entirely, so this can help a few years down the road.
- Free Partial Prepayment. As mentioned in point 4, most banks have a prepayment penalty if you attempt to make repayment early. A free partial prepayment means you can repay up to a certain amount, without incurring a penalty.
It could even be a clause that says you won’t incur the prepayment penalty, if early repayment is due to situations such as selling the property.
- No cancellation fee. Most banks charge a penalty if you attempt to cancel the loan at the last minute; such as 0.5 per cent of the loan amount. This provides some added safety in case anything goes wrong.
In addition to these, there may be subsidies such as free home content insurance, free property valuations, or subsidised legal fees (be sure to check there’s no clawback; see point 3).
None of these features should be the main factor. Always focus on the lowest interest rates first; these features can act as tiebreakers between the loan packages you shortlist.
5. Think beyond the first few years
Interest rates are typically lower in the first few years. For SIBOR loans in particular, the pattern is to be cheap for three years, and then rise in the fourth year and thereafter.
If you’re like most people, you’ll be paying your home loan for 25 to 30 years; so it’s important to focus on the long term rate, and not just the first three years. Never assume you can easily refinance into something cheaper in the fourth year. There may not be any cheaper options on the market by then.
If you’re in doubt about any of this, please ask us on Facebook. When it comes to home loans, a good 10-minute conversation can make 25 years of difference.
For more details on home ownership, check out the rest of this Ultimate guide on Stacked Homes. You can also follow us for in-depth reviews on condos in Singapore.
This is Part 6 of our Ultimate Guide to buying your first home. If you haven’t read Part 5, you can do so at the link!
And that’s the end of the home loan series in our Ultimate Guide. Next up: Second Step: Choosing the right condo development in Singapore