Choosing the Bank to Sell my Life to

The three big local banks in Singapore offers loans with spread added to the base rate – 1. SIBOR; 2. Floating Housing Rate (“FHR”); and 3. Fixed

Being risk adverse, my considerations in order of priority:

  1. Low volatility
  2. Tap on existing, still low, interest rate where possible
  3. Cap on interest rate, where possible

I think SIBOR will be the first to react to the FED’s interest rate hike and it is a no-brainer that SIBOR is not for me given its volatility. It is tempting, because it is the lowest rate being quoted at the moment. However, looking at how high it could spike and how quickly that can happen, I chucked that to one side.

Refinancing might be possible, but I imagine at the point when the rates trend up quickly, the refinancing packages being quoted would have moved up in alignment. 

I was torn between FHR and fixed, but DBS offered something interesting.

1.38% (FHR9 + 1.03%) with lock in for 2 years

AND

A cap of 1.68% for the first 2 years

UOB and OCBC quoted 1.38% (FHR36 + different spread), but without a cap. I must say I’m pleased with this find as locking the interest rates for the holding period (1.58% for 2 years from DBS and UOB, 1.68% for 3 years from DBS) does not offer that much incremental protection. I might be able to tap on the “savings”, if any, during the first 2 years to offset against the third year.

You should note that a lower interest rate at the start of the mortgage period is more beneficial as the bulk of your monthly payment at the onset is not used to pay down the principle amount.  

This is a tip I’m hesitant to share, but I wish I had known this earlier… so there are mortgage intermediaries that consolidates information from the banks and shares it with the buyer. I fully believe the intermediary’s disclaimer that they do not get a cut from me as the end user. The banks are their pay master, so I have been relying heavily on the intermediary for information. Heavily, but not totally. I noticed some banks repriced over a lazy sunday weekend. Naively, I informed the intermediary that I would like to explore this “new” package. What I subsequently found out was that the intermediary did not get commission from my loan as the “new” package I found is targeted at getting users to approach the bank directly and to submit the documents online. For avoidance of doubt, the intermediary did not lie and I feel terrible that they did not get rewarded for working on my case. My purpose of sharing is, there are ways to get a better package for yourself if you roll up the sleeve to do the work and double check what are the rates you can get from the banks themselves.

Another lesson learnt – ask, if you don’t ask, you will not get it! The interest rate that the bank quote you is negotiable, especially if your loan is large and probably if you are of good credit standing. I meekly (because my loan quantum is nothing relative to the scale that the bankers should be used to), but firmly asked and was pleasantly surprised that one of the bank agreed to move their rates down.

What I thought missing from the articles available online are on the miscellaneous costs that one can expect to be incurred in relation to the mortgage.

  1. Valuation Fee (DBS – S$325 +7% GST; UOB S$150 + 7% GST);
  2. Mortgage Insurance (quantum varies, about S$200-S$400 pa)
  3. Fire Insurance (DBS S$??; UOB S$58 pa; OCBC waived)
  4. Stamp duty for the mortgage insurance (usually within the conveyancing package; I was quoted S$2,200 to S$2,500 all-in)

Valuation fee and legal fee have to be incurred should one refinance to another bank. Imagine it to be just redoing the entire process of obtaining a fresh loan. Within the same bank, there’s no additional charges. Given this, you should run your numbers to check if the “savings” make sense against the upfront administrative cost of approximately S$3k. Although I note that some banks offer to offset certain charges to lower the inertia of one switching bank.

On the choice of conveyancing lawyer, some are on the panel of all the local banks. To me, this potentially means it facilitates the refinancing process as the law firm has the information on the existing property and will be faster in turning around the documents without the need to do title search etc. There could also be a chance that they will charge me a lower fees the second time around, but even if this didn’t happen, I am happy with a quicker turnaround time.

As banks have tied up with the insurance companies to distribute insurance products, there are also charges involved should one choose to purchase insurance products from insurance companies that are not their preferred partner. The rate I was quoted from DBS requires me to purchase mortgage and fire insurance from Manulife and MSIG respectively. Needless to say, the rates will be different or I have to pay an admin charge should I choose another insurance company. In this case, an administrative fee of S$100 if MSIG is not chosen.

On mortgage insurance, there are two types: 1. Reducing amount; and 2. Level amount. I think there are articles which summarises what these are and the key considerations to choose one over another (click here for a quick read). Apparently HDB’s mortgage insurance works on the Reducing amount model, but it does not cover private property.

What I would like to add is that there are things that could be well embedded within the quote that the bank’s insurance specialist provided that you might not need or are willing to take on additional risk (i.e. pay lower premium), so do check if the quote included Total Permanent Disability (“TPD”) and Critical Illness (“CI”) insurance. Some of us might already have been covered for these under our existing insurance package.

Another embedded assumption is the interest rate used in the calculation of the premium. I was informed, and did not verify, that the HDB’s mortgage insurance uses 4%. Again, back to my holding period for this particular property, I certainly hope that I will not see a 4% during the years this is in my portfolio.

The questions I thought are relevant – in the event it hits 4%,  will I be worse off or my beneficiaries will not be able to make up the differences for the mortgage amount? I think we can stomach this risk, so I have requested for the interest rates to be lower than 4%.

Hope the above helps someone.

 

Lioness (due diligence, we must do)

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