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
|
|
Loan Interest (3%) |
Deposit Interest |
Total Interest |
|
|
Normal Bank |
Loan |
|||
| Conventional | $1,000,000 x 3% = $30,000 p.a. |
$600,000 x 1% = $6,000 p.a. |
– |
$30,000 – $6,000 |
|
Interest-offset |
$1,000,000 x 3% |
$200,000 (1/3) x 1% |
$400,000 (2/3) x 3% |
$30,000–($12,000+$2,000) |
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.
