If you’re like most Singaporeans, you will probably be taking a home loan for your property too. It’s important to understand the key facts about mortgages that can help you optimize on the monthly instalments and interest payable. This article highlights five essential things to know before committing to a home loan, helping you make smarter financial decisions.
1. Best Ways to Reduce Interest Costs
Interest rates won’t stay low forever. For homeowners with a floating rate home loan, your mortgage may feel manageable now, but it could become more expensive in the future.
One of the main revenue streams of financial institutions is from the interest they charge on loans. In fact, interest income is a massive contributor to a bank’s earnings. Since home loans often stretch over decades, a significant chunk of your monthly mortgage payments goes toward interest.
One strategy is refinancing when interest rates drop, which could potentially lower the total amount of interest you’ll pay over the life of your loan.
2. Understanding Interest Rates and their Shifts
If you have a floating rate home loan, it’s important to know that the Singapore Overnight Rate Average (SORA) has replaced both the Singapore Dollar Swap Offer Rate (SOR) and the Singapore Interbank Offered Rate (SIBOR) as the main benchmark for Singapore Dollar loans and other financial products. Unlike its SOR and SIBOR, SORA bases its interest rates on actual past transactions, making it more transparent and predictable for borrowers. This way, you can anticipate what your rates will be in the coming month, helping you avoid unexpected rate hikes.
Choosing between a 1M or 3M SORA loan depends on your financial goals and risk appetite. The 3-month SORA adjusts quarterly, making it more stable and predictable—an advantage in today’s interest rate environment. On the other hand, the 1-month SORA updates monthly, which can be beneficial in a low-interest-rate climate, allowing you to quickly benefit from rate drops.
If you prefer stability and want to avoid volatility, a fixed-rate loan is a safer option, especially with shorter lock-in periods (1-2 years) that offer more flexibility. However, if you can manage market fluctuations and prefer paying based on market rates, sticking to a floating-rate loan might suit you better.
It’s important to regularly review your loan and choose or refinance (after your lock-in period) to a loan package that aligns with your financial needs and risk tolerance.
3. Essential Insurance to Protect Your Home and Finances
While you can’t buy life insurance specifically for interest rate hikes, you can protect yourself by locking in a fixed mortgage rate for the next few years. Selecting a fixed interest rate for your mortgage is a smart option if you’re not planning to pay it off soon.
Additionally, there are other essential insurances homeowners should consider. For instance, fire insurance is mandatory for all HDB flats, covering structural damages, with premiums ranging from just S$1.60 to S$8.20 for a five-year period.
You’ll also need home insurance, which covers the contents of your home. The cost depends on the coverage you choose, ranging from S$50 to S$350 per S$100,000 of coverage.
Planning for these insurance expenses is crucial to ensuring your financial stability as a homeowner. By budgeting for both mortgage protection and insurance for your property, you safeguard against potential risks while securing your home investment.
4. Hidden Fees to Budget for When Taking a Home Loan
HDB Flat Application Fees
When applying for a new HDB flat, the fee is S$10. For resale HDB flats, it’s S$40 for one- or two-room units, and S$80 for larger flats.
Stamp Duty Fees
Stamp duty is a tax you must pay when purchasing a property. The two main types are the Buyer’s Stamp Duty (BSD) and the Additional Buyer’s Stamp Duty (ABSD). BSD is calculated as a percentage of your home’s purchase price, while ABSD varies depending on your nationality and whether it’s your first, second, or subsequent property.
Property Valuation Fees When Taking a Home Loan
Before your bank can approve your loan, it requires a valuation of the property you’re purchasing. For HDB flats, you can submit a Request for Value at a cost of S$120. For private properties, you’ll need to hire a bank-approved valuer, with fees ranging from S$120 to S$400.
Agent Commissions
If you use a property agent to find your home and arrange viewings, you’ll typically pay a commission. For resale HDB flats, this is usually 1% of the purchase price.
Legal Fees
Legal documents need to be processed by a lawyer when buying a home. HDB’s legal fees are structured as follows:
First S$30,000: S$0.90 per S$1,000
Next S$30,000: S$0.72 per S$1,000
Remaining amount: S$0.60 per S$1,000
This typically amounts to a few hundred dollars. If you opt for a private lawyer, fees average around S$2,500.
Caveat Registration Fees
A caveat is an official notice that you’re purchasing a property, preventing it from being sold to anyone else. The buyer’s caveat costs S$64.45, and a Title Search Fee is an additional S$10. If you’re taking a home loan, you’ll also need to pay S$64.45 for a Mortgagee’s Caveat.
It’s essential to be aware of the various fees involved as these expenses can add up to a hefty cost. Proper budgeting for them will help you avoid unexpected fees and ensure a smoother home-buying process. Planning ahead allows you to manage your finances effectively and make informed decisions as a homeowner.
5. Consulting a Mortgage Advisor Can Save You Time and Money
Taking up a home loan is a major financial commitment, but being well-informed can make all the difference. From understanding fees to exploring the best mortgage options, planning ahead ensures a smoother journey to homeownership. For personalized advice tailored to you, don’t hesitate to consult a mortgage advisor, let experts help you make the most of your investment.
At Redbrick, we work with 16 banks in Singapore and have access to more than 120 home loan packages. By understanding your unique financial situation, we can assist you in finding the loan that suits you best.
