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How to Save Money on Your Home Loan?
By PEARL LIM
Choose a suitable loan
Right from the start, make an informed choice – switching to another package too early, that is
during the lock-in period (usually the first 2 to 5 years of the loan) will incur a penalty of 0.5-1.5%
of the redeemed loan amount. Even if there is no lock-in period, you may still incur closing costs
like legal fees.
In other words, do your homework and research all the home loan packages available in the market.
If that is too tedious, simply turn to a mortgage consultant, who will provide free advice - click
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here.
If you select the right mortgage, this can translate into substantial interest savings.
For example, if you have substantial idle cash set aside for contingencies, you can consider an
interest-offset loan, instead of the conventional fixed or floating (variable) rate loan. We illustrate
the interest-savings you can make from this choice.
When choosing between loan types, another key consideration is the interest rate environment.
During a low interest rate environment, a floating rate loan usually incurs lower interest payment
compared to a fixed rate loan. But the situation may change when rates swing upward. To prevent
too high a hike, opt for a floating rate loan that comes with an interest rate cap – a few banks may
offer this occasionally.
To learn more about selecting an ideal loan, read our previous articles: “How Do I Compare Home
Loans in Singapore?”. But as each individual's financial situation and needs are unique, it will be
best to speak to a mortgage consultant.
Rest
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Rest is the frequency in which the outstanding loan amount is calculated. There are 4 types of rest:
daily, monthly, quarterly or annual. Most home loans in Singapore follow a monthly rest, a few are
daily; while quarterly and annual are rare.
To obtain interest saving, you should opt for a shorter rest. This is because the monthly interest
payable is calculated based on the principle outstanding from the last time the bank's calculated it.
For example,
•
Loan Quantum = S$1 million
•
Loan Tenure = 30 years
•
Year 1 Interest Rate = 1.2% p.a.
•
Monthly Interest Rate = 0.1%
Table 1
Interest for Annual-reducing
Loan (S$)
Interest for Monthly-reducing
Loan (S$)
1st Month
1,000
1,000
2nd Month
1,000
997.69
.
.
12th Month
1,000
974.47
Total Annul Interest (S$)
12,000
11,847.09
.
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From Table 1, we can see that the total interest is relatively lower for a loan with a monthly rest.
Because the principle is repaid each month, and the monthly interest computed is based on the
monthly outstanding principle, not the annual.
Although loan instalments are monthly, a daily-reducing loan will still offer slightly lower interest
payment compared to a monthly-reducing. It also has the advantage of lowering the interest payable
almost immediately after partial prepayment is made. For instance, with a monthly rest that reviews
the outstanding balance on the 1st, and if you were to make a prepayment on the 15th you would
have to wait till the 1st of the next month before your balance is adjusted.
Therefore, all else being equal, always try to select a loan with a lower rest.
Partial prepayment
If you happen to have extra cash on hand, and no lucrative investment to spend it on, use it towards
paying down your home loan. This will reduce your principle and hence interest chargeable.
However avoid repayment during the lock-in period; otherwise you may face a penalty which can
outweigh the interest saving. The below illustrates.
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Bank Y Fixed-rate Loan
Period
Interest Rate (p.a.)
First Year
1.15%
Second Year
1.35%
Third Year
1.45%
Fourth Year Onwards
0.50 % below the Board Rate
•
Repayment Amount = S$20,000
•
Prepayment Penalty = 1.5%
•
Penalty Charge = S$300
The interest computation in Table 1 is based on a monthly-reducing loan (monthly rest).
Table 2
Outstanding Loan
Outstanding Loan
Interest Saving (S$)
Amount = S$1 million Amount (after
S$20,000 repayment
in Year 2) = S$980,000
Year 2 Total Annual
Interest (S$)
13,324.91
13,058.41
266.50
Year 3 Total Annual
Interest (S$)
13,900.83
13,622.82
278.02
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Thus, if the lock-in period expires at the end of Year 2, you will be worse off by S$33.50 (300 –
266.50). However, if the lock in ends at the end of Year 3, you will be able to have interest saving of
S$244.52 [(266.50 + 278.02) – 300].
We can infer that prepayment if made during the lock-in period should be done earlier rather than
later. The other two factors that determine if it is worthwhile to make prepayment during the lock in
are the interest rate and the penalty rate.
Refinancing or repricing (conversion)
Refinancing occurs when you switch to a loan package with a different bank. Repricing
(conversion) is when you switch to a different package with the same bank.
Do so once every few years, particularly after the lock-in period, to see if there is a better loan
package around.
Moreover, after the first few years of the loan, the spread or interest rates are almost always revised
upwards. This is true for whichever loan types.
Furthermore, banks may introduce new loan features from time to time; like interest rate cap, rates
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pegged to the average of both SIBOR and SOR or set to the rate of the CPF Ordinary Account,
options between fixed or floating rate after the initial few years of the loan, and etc. Who knows
some of the features may suit your needs perfectly?
Refer to “A Guide to Housing Refinancing in Singapore” for more advice about refinancing.
For more related articles, please visit the following websites:
www.PropertyBuyer.com.sg/articles
www.SingaporeHomeLoan.net
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About iCompareLoan Mortgage Consultants
iCompareLoan Mortgage Consultants is a research focused independent mortgage broker.
We emphasize a consultative approach where we match our client’s financial situation with
the best fit mortgage loan, not simply a cheap loan.
We also help property buyers in their buying process by helping them avoid pitfalls from
unscrupulous property agents. (We are not property agents, therefore there is no conflict
of interests.)
We also developed a proprietary home loan reporting tool which provides amongst other
things, 23 years SIBOR history as well as 6 years worth of SOR.
Our Services: Home Loans
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Why use iCompareLoan Mortgage Consultants?
Our service is free as banks pay us a commission upon loan deals completion. Banks in
turn save on staffing cost as we are not on their payroll.
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