Buying a house is one of life's biggest purchasing decisions, and once you have decided on where to call home, the next step is to work out your finances before kickstarting the process to take out a home loan.
When shopping for loans, it is important that you choose the package that best fits your budget, as this will help to minimize the stress that the new financial commitment may bring. You should also be prepared to shift around priorities in your monthly expenditure.
Here are four tips to help home buyers in their decision making process.
Assess your financial position
With a recurring expense that is likely to last for a number of years, you need to have a clear picture of where you stand financially and how much you are able to set aside for monthly payments.
Make an inventory of your monthly finances, such as disposable income, savings, spending habits, as well as essential and discretionary costs. It could also include CPF (Central Provident Fund) money, or credit card bills.
Thereafter, think about how much you have and then decide on how much you should borrow.
In Singapore, a wide variety of home loan options and lenders are available, depending on the type of house they are looking to purchase.
Singaporeans who are buying Housing Development Board (HDB) flats may choose to either borrow money from the government through CPF--if eligible--or from banks. HDB flats are the island-state's public housing, and may only be bought by citizens and permanent residents.
An alternative for those ineligible for government loans and foreigners is bank lending.
Singapore is a major financial hub in Asia, and on top of the country's three banks--DBS (Development Bank of Singapore), UOB (United Overseas Bank) and OCBC (Oversea-Chinese Banking Corporation), many international banks have also set up shop on the island-state.
Foreign banks that offer home loans locally include UK-based HSBC (Hongkong and Shanghai Banking Corporation) and Standard Chartered Bank, Malaysia-based Maybank (Malayan Banking Berhad), RHB Bank (Rashid Hussein Bank) and CIMB Bank, US-based Citibank, as well as China-based Bank of China.
Compare different types of interest rates
In Singapore, the interest rate on home loans offered by banks typically fall into either the fixed or floating category. Use home loan calculators to work out various repayment scenarios and determine the most suitable loan package. Scores of loan calculators are available online.
For fixed rate loans, interest rates are fixed and guaranteed for the first few years of the loan. Thereafter, the interest rate will be floated and be pegged to a reference rate, which will likely vary from bank to bank.
Examples of the benchmark rate used by lenders here include SIBOR (Singapore Inter Bank Offered Rate), Swap Offer Rate (SOR) and the CPF interest rate. SIBOR and SOR are determined by market forces.
On the other hand, the interest rates of floating rate--also known as variable or adjustable rate--loans are floated throughout the duration of the loan, and are also pegged to a reference rate.
There are, however, new products in the market that marry both the fixed and floating rates. An example is Maybank's Hybrid Home Loan, which was launch in April this year to tap the current low interbank rates, "features a 3M (three-month) SIBOR-pegged rate for the first year and fixed rates for the second and third year"", according to the Malaysian lender.
Home buyers should note that a lock-in period of between one and five years may be imposed by the banks.
Length of housing loan
Another factor to consider is the length of your loan term, which will determine the sum of interest on the loan, and in turn the total cost of your house.
Some borrowers prefer a longer repayment term as it lets them have a lower monthly payment. Home buyers should note that the longer you take to pay off your loan, the more interest you are likely to end up paying, and as such, increasing the total cost of the house.
A shorter repayment term would most likely result in a higher monthly payment, but the sum of interest you end up paying is less. Also, the total cost of the house is lower, compared to a longer term loan.