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MORTGAGES
What Are Mortgages?
Mortgages are an advance given by financial institutions. A Borrower
will need to put up their property title as collateral for the
mortgage. Most property purchases are partially financed by mortgage.
Mortgage Terms
Listed are some fundamental terms pertaining to mortgages.
- Loan
amount is the amount that a Borrower wishes to loan. It is usually 80-
90% of the purchase price of the property.
- Interest
rate is the amount a Borrower needs to pay to the Lender over and above
the amount loaned. This is incorporated into the monthly loan repayment
plan. Different financial institutions offer different rates; there are
fixed rates, flexible rates or a mixture of both types of rates.
- Loan
term is the duration over which the loan is repaid. It usually ranges
from between 10 to 30 years, depending on the age of the Borrower.
Repayment Scheme
Loan instalments are usually paid on a monthly basis. The monthly
repayment amount is a combination of both principal and interest.
Uses of Mortgage
Borrowers can use mortgages to purchase an investment property or principal residence property (own use).
Mortgages are usually used to purchase a new property or refinance an existing property.
Types of Mortgages
There are many types of mortgages offered (various packages) by
financial institutions in Singapore. Some of the mortgage packages
available in Singapore are:
- Capital and interest mortgage
is the most standard type of package offered. This package offers a
fixed monthly repayment amount consisting principal and interest
repayments. In the initial years of the loan term, a bigger portion of
the monthly repayment amount goes towards the interest portion.
Principal portion will progressively increase as the loan term
proceeds. Once the Borrower fulfils all the loan term repayments; the
debt will be fully repaid.
- Cash back mortgage
is where the Lender gives a portion of the loan back to the Borrower in
monetary form. In most cases, the Borrower will be locked-in for a
certain period of time.
- Combo or hybrid mortgage
is more flexible as it allows the Borrower to combine different loan
packages in a single mortgage. For example, the Borrower can start on a
fixed rate package for a certain number of years and then switch to a
floating rate package thereafter.
- Interest-offset mortgage
is currently a very popular type of mortgage. A Borrower is allowed to
earn interest (albeit only a certain fixed portion, usually 2/3 of the
deposit amount) on their deposit to help offset the interest on the
mortgage. The remaining of the deposit earns a lower rate. This is to
attract those with a significant amount of cash placed in banks that
earn lower deposit rates.
The example as below illustrates:
Loan Amount = $1,000,000
Deposit Amount = $ 600,000
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Loan Interest (3%) |
Deposit Interest |
Total Interest
on Mortgage
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Normal Bank
Interest Rate
(1%)
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Loan
Interest Rate
(3%)
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| Conventional |
$1,000,000 x 3%
= $30,000 p.a.
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$600,000 x 1%
= $6,000 p.a.
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- |
$30,000 – $6,000
= $24,000 p.a.
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Interest-offset
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$1,000,000 x 3%
= $30,000 p.a.
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$200,000 (1/3) x 1%
= $2,000
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$400,000 (2/3) x 3%
= $12,000
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$30,000–($12,000+$2,000)
= $30,000 - 14,000
= $16,000 p.a.
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Total interest saved = S$8,000
- Interest-only mortgage
is where monthly repayments cover only the interest portion. No
principal repayments are made during part or the whole loan term, but
only paid at the end of the loan term. Usually, Borrowers who choose
this option have the intention to refinance the loan at the end of the
loan term.
- Fixed rate mortgage
is good for Borrowers who like the certainty that the interest rates
will not increase drastically. The fixed rates are offered for a
definite time period, after which it will become a floating rate loan.
This package will usually have a locked-in period and early repayment
penalties.
Singapore only offers fixed rate mortgages up to 3 years.
- Variable rate mortgage
is a loan with rates that can change during the loan term. The interest
rate is calculated based on a reference rate and a margin. There are 2
types of reference rate – bank’s internal lending rate or SIBOR
(Singapore Interbank Offered Rate).
- Bank’s
internal rates are determined and changed by the bank at their
discretion. Bank usually gives at least a 1-month’s notice to the
borrower when they plan to change their internal lending rate.
- As
for SIBOR, it permits the rate to be adjusted every 3 or 12 months,
depending on which SIBOR the loan is attached to. Most variable rate
mortgages can be paid off early except in the case where the margin is
lower for a given lock-in period.
- Payment holiday mortgage
is a loan feature rather than a loan type. Many loan packages in
Singapore offer Borrowers the opportunity to take a break from their
monthly repayments.
Refinancing – Why Borrowers Refinance?
Refinancing happens for various reasons. In general, it is because
banks offer initial discount rates that become higher after the lock-in
period expires. Borrowers will refinance to get lower rates again. This
sometimes can allow Borrowers to increase their loan amount thus
keeping as little money as possible attached to the property. In
Singapore, current loan rates are lower than the inflation rates; hence
having more loans is actually advantageous to the Borrower. By large,
mortgages are the cheapest means of financing available as compared to
personal loans and other types of loan.
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