Mortgage Packages and Features

There are many kinds of mortgage packages available in the market.This document highlights the different type of packages and featuresthat banks offer in Singapore currently. Some mortgage package can alsohave a combination of the features highlighted here.

Capital and Interest Mortgage

Thisis the standard mortgage package. Monthly payments are made towardspaying both the interest and the principal. Each monthly payment isequal, so in the early years of the loan term, larger part of themonthly payments is towards interest payments. And then the principalpayment part gradually grows larger over the loan term. At the end ofthe loan term the debt has been fully repaid.

Cash Back Mortgage

Ina cash back loan, the lender gives portion of the loan back to theborrower in cash. In this kind of arrangement, the borrower istypically tied to the loan for a certain lock-in period.

Combo/Hybrid Mortgage

Acombo mortgage allows you to divide you total mortgage loan intoseparate parts and apply a different loan package to each of them. Itcould, for example, be two part loan with one part on fixed-ratepackage and another part on a floating rate package.

Interest-offset Mortgage

Recentlymost banks have started offering interest-offset packages where you canget same interest rate on part of your deposits and you pay for yourmortgage loan. Typically the ratio is 2/3 of your deposit, so itdoesn’t fully offset your mortgage interests. The remaining of thedeposits will have a lower rate. This is to attract people who have alot of cash sitting in bank with current very low deposit rates.

For example, your loan is $500k @ 3% interest. And you have $300k in bank - let’s say at deposit rate of 1%.

Yourloan interest is $15k / annum. You can get 2/3 of you deposit at 3% and1/3 at 1%. Your deposit interest is therefore $200k x 3% + $100k x 1% =$7000 / annum. Once you offset the interests, you only pay $8k / annumfor the mortgage interest.

Interest-only Mortgage

Asthe name implies, there are no principal payments during a part or thewhole loan term and the loan balance remains unchanged during thatperiod. The monthly payments are only to pay for the interest. The fullloan principal is then paid at the end of the loan period - ortypically the loan is just refinanced.

Fixed Rate Mortgage

Forsomebody who wants to be sure exactly how much the monthly payment willbe and not worry about interest rate changes, there are fixed rate homeloans packages available. Fixed rate packages offer a fixed interestrate for a certain period, after which it becomes a floating rate loan.Fixed rate loans also typically come with a lock-in period and earlyrepayment penalties.

Fixed rate packages in Singapore are onlyoffered up to 3 years, so the kind of 20 or 30-year fixed ratespackages offered in many other countries are not available here.

Payment Holiday Mortgages

Thisis more of a loan feature than a loan type itself, but many loanpackages offer a possibility to take a break from monthly paymentssometime during the loan term. This can be, for example, 1 or 2 monthlypayments every year.

Variable Rate Mortgage

In avariable rate housing loan the interest rate can change during the loanterm. The interest rate is calculated based on a reference rate and amargin. The reference interest rate is either bank’s internal lendingrate or SIBOR. If the reference rate is SIBOR, the loan interest rateis adjusted every 3 or 12 months (depending which SIBOR the loan istied to). If the loan is tied to bank’s internal rate, the bank usuallygives at least one month notice to borrower. Variable rate packages cantypically be repaid early, except in cases where the margin is lowerfor a given lock-in period.