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Mortgage Financing Made Easy: The ABCs of Taking a Housing Loan
By Property Buyer
We understand that comprehending the terms and contents of a loan contract, and finding the right mortgage that fits our lifestyle and financial capacity can be a challenge for borrowers, especially for first-timers. Thus this article attempts to shed some light about the process - from mortgage selection, determining which interest rate serves you best, to meeting the requirements for the loan. The goal is to help you become aware of some of the advantages and disadvantages in selecting a particular loan package as well as to safeguard your pockets.
Establishing a good credit history
First of all, a loan can never be granted if you have a bad credit standing. The Credit Bureau in Singapore collects certain credit-related data, like all the credit facilities a borrower has with the various financiers (but not the outstanding amount owed), and then makes the information accessible to credit providers on its membership list. The best way to obtain a good credit score is to pay your loan or credit cards on time. Late payments and defaulting on loan payments to any financial institution is bad because this will adversely impact your credit score. Having a low credit score will lock you out of loans with the best interest rates because the banks or lending institutions will decline your loan application. If you are planning to take a loan, then you should start creating a good credit history. The Bureau collects records of residents with a rolling 12-month credit facility. For closed accounts, the Bureau still shows the last 12 months history of the account before it was closed. On time payments normally gain a credit score of 12 'A'.
Owning multiple credit cards reflects weaker financial status
Most people think having many credit cards is an advantage. However, owning multiple credit cards can weaken your financial health as these plastics provide a false sense of financial strength, which is spending on borrowed money. Owning multiple credit cards in the absence of discipline usually ends up being highly indebted to banks. This means you should own fewer cards.
In addition, having excessive cards creates another disadvantage. This reduces the overall loan borrowing quantum of the borrower. Remember, that banks always compute your loan value based on your availed credit facilities against your monthly earnings. This means that even if you are not using the credit card, it has already reduced the amount of the loan you are allowed to avail for buying a new home.
Checking your credit score
You may personally request for a credit report from the Credit Bureau of Singapore. Find out if your credit facility and credit standing were correctly stated.
Finding the best house and location
We need to understand that finding the best house and location should be a house that meets our budget. Please do not avail a loan and buy a house that would make things difficult in the future. Live the kind of lifestyle your pockets can afford. Purchase a house with the amount of mortgage you find comfortable financing. The ideal way to select a loan and a house is to evaluate whether you still have the capacity to pay the monthly amortization when your financial situation becomes worse. To help you gauge if you can afford the rate and the monthly dues, you may want to use the debt-to-service ratio (DSR) formula based on a 30% affordability estimate as follows
DSR = Monthly Debt Service for Mortgage / Monthly Gross Household Income
In some aspects, some users of the DSR criticised it as a short-term measure of the borrower’s housing affordability. The discussion of other short- and long-term indicators of housing affordability, however, is beyond the scope of this article.
But you can still use the DSR formula for a variety of economic scenarios because in the course of the mortgage life, factors such as the rise or fall of the household income and the debt service normally take place. A good situation that could make use of the DSR is when you or one of your family members become unemployed, which means loss in earnings. You may also use the DSR when you see a pattern of increasing financial liability or debt service, which usually occur when there is a change or an increase in the financial market interest rates.
Overall financial liabilities
This is most important. You need to understand the impact of having too many loans or credit cards. You need to take into consideration the sum value of your total liabilities besides the DSR. One item to consider is the educational and medical expenses of the children or the entire family. Are you sending your children to school? Do you have any member of the family needing special medical attention? Yes or No, the answer directly affects your ability to pay the additional loan and the existing debts. In case of any future contingencies, you need to make sure you still have the capacity to finance the additional loan and pay the existing debts. The goal here is to avoid future contingencies forcing you to sell the house even at a very low price.
Searching for the right lending institution to finance your mortgage
It is the borrower’s duty and responsibility to perform some research about the market interest rates, and loan packages being offered by different banks or lending institutions. Market rates are constantly changing resulting in financing institutions constantly innovating their loan packages and products to meet the needs of borrowers. Find the best loan features that would fit your lifestyle and pocket.
The features of any mortgage package or product usually varies in terms of the rate. It could be offering a fixed rate, floating, or a combination. The combination of the fixed and floating rate is known as the hybrid loan. Some banks also offer interest-offset loans. To find out more about the various loan types, go here.
Selecting loan interest rates
The answer for this is really very simple. Find the rate you can afford to pay even in the presence of financial contingencies. Select a rate that would more or less provide affordable monthly payment throughout the life of the loan. It is best to think about this before committing to any loan because we should not be too confident or assume we always get the chance to refinance or reprice the loan during the course of the loan.
1. New regulations from MAS directly affects borrowers
We need to admit that the Monetary Authority of Singapore (MAS) regulation factor is uncontrollable. We are not in control here. MAS has the right to change and implement new regulations that may or may not directly affect our loan. New rules may make the borrowing terms and conditions tighter or more relaxed. A good way to explain this was the October 6 2012 mandate of loan refinancing. MAS implemented a 35-year cap on loan tenures for new and refinanced loan packages.
2. Change in interest rates
As we all know, banks change the interest rates of their loans. Sometimes, we may find ourselves facing higher interest rates when we wish to refinance/reprice.
To help you understand the impact of the interest rate and the timing, please read the clearer explanation/ example below
Loan Package X has an interest rate of 1.5% for the first three years, and 1.7% thereafter.
Loan Package Y has an interest rate of 1.3% for the first three years, and 2.0% thereafter.
For example, if you decide to commit or take Loan Package Y now because it has a 1.3% rate, which is lower than the Loan Package X of 1.5%, because you expect to reprice or refinance the loan after 3 years (if you can see the 1.3% is only good for the first 3 years), then you might be disappointed if you discover that after 3 years, the cheapest rate available is only 1.9%.
It is better to start with the Loan Package X with a 1.5% interest rate for the first 3 years, and then 1.7% thereafter. Even if you have the option to wait for a lower interest rate after the first 3 years, you still would be paying a higher interest rate during the wait.
What message are we trying to drive home here? We need to understand that choosing the best loan package require good understanding of the system, loan regulations, market, and the movements of interest rates. Thus if you are confused aboutchoosing the ideal loan, then you should speak to a professional mortgage consultant, who will offer free advice. Contact one here. The consultants at iCompareLoan also use free reports from Singapore's most advanced cloud-based home loan analysis system (exclusive to them) to help you select the most suitable loan.
Reputable lending institution
Make sure you choose a reliable lending or financial institution. There are times when some lenders implement the right for a margin call when valuations fall.
Legal help in understanding the loan packages
The bank sends a Letter of Offer to successful applicants. Therefore, we need to understand the content of the letter especially the attached terms and conditions of the loan package before signing on the dotted line. In case you do not understand some terms, please ask the bank to send you a document that explains the Letter of Offer in simple language. If it is still vague and you still have questions, please consult a lawyer.
Are you planning to make a loan in the midst of changing jobs?
It is highly recommended that you wait for the loan procedure to be completed before you change jobs because lending institutions have a minimum employment period requirement in your current job before granting loan approval.
Additional credit card or new loan
You need to understand that additional credit cards or taking new loans add to your total liability, which affects your borrowing eligibility and amount. It is recommended that you do not make any other loan or credit commitments before loan disbursement.
For example, you are applying for a housing loan but want to have a new car too. A week after you have received your approved in principle home loan notification, you finance a new car using a separate car loan. After you had taken home your new car, the lender or bank discovered you financed your car with a car loan. The only option left for the bank is to reduce the loan quantum because of the additional loan you just took for the car. The reduction of the housing loan amount makes it impossible for you to afford the house you want. The deal goes off and the 1% deposit you made would be forfeited. You lose more than you gain by taking both loans. It is important to patiently wait and understand how certain decisions about loans and other related services could affect your housing loan. If in doubt, turn to a Singapore home loan consultancy.