How to Identify Your Mortgage Goals and Plan For Them
Comparing home loans can be complicated for most homeowners, what with having to check interest rates, work out the Total Debt Servicing Ratio (TDSR) and decide whether to use CPF or not (and if yes, how much?). However, the eventuality of it does kick in when we all start to embark on this inevitable journey.
If you are out there hunting for the best possible mortgage loan to fit your needs, it might be hard to determine what is the best way forward, or even define what "best" means to you.
Related article: Is There A “Best” Housing Loan Package in Singapore?
To find the ideal mortgage, you need to first identify what you want to get out of your mortgage. This way, you will have a personal benchmark to judge whether a mortgage meets your objectives, as well as your long and short-term goals accordingly.
To help with your research, we have put together a guide for you to navigate your new home ownership journey and determine what your specific goals are for your home loan, also known as a mortgage.
What Is A Mortgage?
Let’s start with the basics first. A mortgage is a type of loan you can use to buy or refinance a property or land. They are a simple way to buy a home or a piece of land without having to pay it all with cash up front.
Related article: A Beginner’s Guide to Mortgage and Housing Loans in Singapore
What Constitutes A Mortgage?
Most mortgages consist of four parts:
- Loan amount – this is the amount you will be granted by the lender (a bank or HDB) which consists of about 80% – 90% of the total property purchase value
- Downpayment – this is the amount that you will need to pay upfront in cash or CPF of the total property purchase value
- Interest rate – interest rates can be fixed or flexible, they add to the total loan amount and contribute to the total loan amount you will eventually have to pay back to the lender
- Loan tenure – this is the duration of time your loan is valid for and thus the time you can take to pay back the full loan amount. In Singapore, the maximum loan tenure can be up to 25 years (new purchase) or 30 years (refinancing)
Want to save more on your existing mortgage? Compare the best home loan rates in town or check out PropertyGuru Finance for more personalised advice and recommendations:
What Do You Want To Achieve With Your Mortgage?
The best mortgage for you might not be the best mortgage for the next person. That is to say, everyone has different goals when it comes to property ownership and thus might be looking for different mixes of factors and risks when they attempt to find the best mortgage for their needs.
Here are some common priorities home buyers have when choosing a home loan or mortgage.
1. The Lowest Interest Rate
For those who want the lowest interest rate possible, the good news is that there is a considerable variation in interest rates offered by different mortgage packages and rates in the market that can make an ultimate difference of thousands of dollars.
However, do take note that there are many definitions of "lower". Do you mean "lower" rates offered upfront or in the near future? Or "lower" in the long term?
Many people take a "lower" interest rate to just mean the smallest number at the point of borrowing. However, depending on whether this is a floating rate (variable and pegged to the movement of various market benchmark rates such as the SIBOR) or a fixed rate (guaranteed for a period of years before reverting to a floating rate), that small number may not remain small forever, and what you think is a "low" interest rate may not actually fulfil your goals.
Related article: Fixed vs Floating Rate Home Loans: How to Pick the Right One
If a low interest rate is your goal, then you need to ask yourself how often you intend to go through a cycle of refinancing. If you want to stay with a loan for the long run without constantly changing packages, then you may want to look at a mortgage rate that may not be the lowest now, but has the lowest rise over the long run. Conversely, if you don’t intend to stay with a mortgage package long and plan to reprice or refinance regularly, then you can take the risk of going with the lowest absolute rate on a short-term basis.
An important consideration to take note of when you are looking to refinance is the added costs of refinancing. Refinancing involves fees such as legal fees, valuation fees and so on, which can add up. Most of the time, these costs are mitigated by subsidies provided by banks, but such promotions are seasonal and shouldn’t be taken for granted.
The decision between fixed vs floating rates depends on your personal preference and needs, but the general rule of thumb is that floating rates are more attractive during a recession, whereas fixed rates are better when the economy is doing well and the property market is on the rise.
2. Paying Off The Home Loan ASAP
Many homeowners who are not concerned about month-to-month cashflow often aim at reducing their overall cost across the duration of the entire loan, by minimising the dollar amount of interest they have to pay in the long run.
If you call into this category, a mortgage that accomplishes this goal optimally would strike a balance between the following factors: a low interest rate, a short loan tenure and no prepayment charge.
Bearing in mind what we’ve said about how a "low interest rate" changes according to your goals and situation, an interest rate that is either lower in the long term (if you intend to keep the mortgage) or lower in the immediate future (if you plan on refinancing in a few years) will help to keep your interest costs down.
Additionally, one of the best ways to keep interest low is to reduce the number of instalments your mortgage is spread out into—in other words, to shorten the loan tenure. Fewer years on your loan mean less interest payments and a larger proportion of each instalment actually going to paying off your loan principal. However, a shorter loan tenure does mean a higher monthly repayments, so make sure you are able to sustain this payment schedule!
Besides your loan tenure, another good way to reduce the amount and time you take to pay off your home loan even further is to make prepayments whenever you have the cash, using lump sums to pay off parts of your loan principal. Some banks and mortgages include pre-payment charges that may erode any potential savings from interest, so if your goal is to reduce total payments overall, and you foresee being able to afford pre-payments, you should be looking for a mortgage that does not charge you for it.
Finding a mortgage with a specific combination of factors may be harder than just shopping for one in general. To make the search much faster and easier, turn to those who have knowledge of all the mortgages in the market, like PropertyGuru Finance’s Home Finance Advisors, and let the analysis be done for you by experienced industry veterans.
Alternatively, if you’re more DIY and want to figure it out for yourself, you can also sift through all the available home loans from major banks and institutions in Singapore with our home loan comparison tool.
3. Lowest Monthly Mortgage Repayments
Due to the nature of home ownership in Singapore, most young couples have huge financial commitments from the beginning of their marriages. This often leaves them cash strapped and having to choose the mortgage loan option that gives them the lowest monthly repayments their bank accounts will allow for.
If you are in such a situation, you’ll want to look for mortgage packages that offer you the longest loan tenures as this tends to spread out the amount payable over time, resulting in lower monthly instalments.
In the short run, this will allow you to fall within a favourable TDSR and keep monthly repayments more manageable. However, do remember that since you will be charged interest for a longer period of time, you are likely to end up paying more interest in the long run.
One thing to take note is your ages and incomes at the time you are borrowing. The older you are, the less wriggle room you have to play with loan tenure as a factor in your mortgage, as your loan-to-value percentage is slashed if your intended loan tenure will last beyond your 55th year of age.
Bringing in a younger joint borrower may help average the age for the purposes of the lender’s calculations, but that only helps if the joint borrower is also earning a commensurate income that gives his younger age the necessary weightage. The joint borrower also needs to be a homeowner in order to be considered.
Best way to find the Best Mortgage Loan for your Needs
We hope that this breakdown has been useful in helping you to identify and define your own goals, so you can better judge the suitability of your shortlisted mortgages. However, even with all the help and guides out there, it’s entirely likely that picking a mortgage loan can still be too bewildering or time-consuming to do alone.
In that case, we suggest relying on PropertyGuru Finance’s Home Finance Advisors to help you arrive at the best decisions and mortgage choices, and to help you do the necessary applications to ensure success.
With our Home Finance Advisors, you will remain in control of the process, but benefit from seasoned expertise that will take into account both your short- and long-terms goals, as well as any future refinancing or selling decisions that you may have, to help you find the best path to arrive at the optimal outcome for your own unique situation. Planning not just for now but for the future is what professionals do best and we suggest taking full advantage of their skillset to secure a better financial future for yourself.
Disclaimer: Information provided on this website is general in nature and does not constitute financial advice.
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