1) Home loans are cheaper than other loans.

Of course, you are always better off paying low interest rates when you borrow, and the lowest are for home loans.  Nothing else is cheaper.

Therefore, consider borrowing to the max on your home loan.  It means (i) borrow as much as possible (ii) for as long as possible and (iii) pay it off as slowly as possible.

Pay off your other loans first since they are always more expensive. In fact, you are better off if you can avoid other borrowing altogether.

2)  There is not much difference in home-loan rates.

The difference among all bank home loans is only a few tenths of one per cent.

The established benchmark home loan is a “2-year variable-rate loan”.  The top banks have nearly identical published rates for this standard loan package.

Nearly identical rates are not necessarily anti-competitive but they do limit the opportunity for price comparisons. 

3) Refinance early and often.

There is a substantial difference between the banks’ first and third-year interest rates.  This difference is the minimum you can save by refinancing your home loan. 

It could be more since banks often charge rates that are higher than their advertised loan rates.

Banks have said they are under no obligation to offer home loans at their low advertised rates for years 1, 2 and 3 of variable rate loans.  Those rates can increase at any time. 

The advice from the banks is to “Review your home loan once every few years to see if you can get a better deal by refinancing, particularly so after your lock-in period.”

So, if your lock in period ends this year, you can look into refinancing in 2010 and then again in 2013, etc.  “Every few years” is the recommended interval in the Consumer Guide to Home Loans by ABS.

It also advises that there is no need to look too far when shopping for a new home loan.  Your first stop should be at your own bank.  The Consumer Guide says, “Ask your existing bank for re-pricing options, before checking with other banks.” 

Both pieces of advice can be questioned. First, you can save the most by refinancing as soon as your lock-in ends.  There is no benefit to waiting a “few years” to refinance your home loan.

Second, there is no need to favour your own bank, especially of you are out of the “legal subsidy clawback” period. It ends after 3 years. 

The guide’s advice to stay with your own bank reduces competitive shopping.  It is in the interest of the banks.

4) Rates are valid for 30 or 60 days.

The bank has the right to serve you 30 or 60-days notice that it intends to increase its rates. 

The bank’s first-year rates are binding on the bank only for that short period of one or two months.  The second-year loan rates are not binding at all. Neither are the bank’s third-year loan rates.

Not all borrowers understand that a bank may advertise first, second and third year variable home-loan rates of 3.25, 3.50 and 3.75 per cent – but it does not commit them in any way.  Banks are free to charge whatever rates they choose.

5)  Ask the earliest date you can refinance.

Upon taking out your home loan, you should ask the bank (i) the earliest date you can refinance your home loan and (ii) when you must notify the bank of your intent to refinance.

In fact, you can ask the bank to remind you that it is time to refinance your home loan. Tell them to inform you 90 days in advance of when the lock-in period ends.  

6) “Board rates” are confusing.

Many borrowers find board rates confusing.  The term “board rate” sounds official as though it is set by a statutory board.  It is not.  It is set always by the bank. 

Each bank has a series of board rates, determined by when customers have taken out their loans. 

No significance should be attached to the board rate.  All that matters is the final rate you pay.  Banks usually quote some numbers so you can calculate “the board rate minus the fixed discount”.

It would be just as easy to tell you the final home loan rate that you must pay.  There is no benefit to going through the “board rate minus the discount” calculation.  Many borrowers find it confusing.

7) Banks now offer “truly adjustable rates”.

In response to criticism of the confusing board rate system, banks have come up with adjustable rate mortgages (ARMs) which are pegged to a variable interest rate such as the Singapore inter-bank offer rate (SIBOR).  The ARMs are truly variable, whether rates are going up or down.  They are transparent, flexible, fair and overcome all the drawbacks of the board rate system.

From the banks’ perspective, however, it is expensive because ARMs automatically adjusts rates lower when rates are falling.  It no longer requires customers to take some action in order to refinance their home loans to get the lower rates. 

Many customers forget or do not get around to refinancing.  As a result they end up paying higher mortgage rates than necessary.  The overpayments are a source of profits for the banks.

ARMs take away this profit opportunity.  To compensate for their loss, banks charge from one-half to one per cent more for ARMs than for standard variable-rate home loans.  As a result, this very useful type of home loan has failed to catch on and is still not popular with borrowers.

DBS AND PEGGED HOME LOANS

DBS has taken pegged home loans (ARMs) the farthest. The problem is they are also more expensive than a standard variable-rate mortgage. 

(i) HDB HOME LOANS: POSB's HDB rate is the CPF Board rate (2.5 per cent) plus 1.58 per cent.  It comes to 4.08 per cent.  This is above POSB'S 2-year fixed rate of 3.68 per cent. More importantly, the 4.08 per cent interest rate is nearly 1 per cent (0.9 per cent) above the lowest rate (by Maybank), which charges 3.18 per cent for a variable-rate home loan with a  2-year lock-in.   

(ii) PRIVATE PROPERTY LOANS: DBS's lowest private home loan rate is 3.35 per cent fixed for year one.  After that, the DBS home loan converts to SIBOR + 1.25 per cent.  At present, this comes to 3.93 per cent.  It is 0.6 per cent above the DBS variable rate loan.  It means it would be worthwhile to continue to re-price the loan at DBS at the end of each year, going back to the year one rates.

Even if SIBOR should fall by 0.6 per cent, it is almost certain that DBS's first-year fixed-loan rate would also fall.  It means there would still be a positive spread between the first year fixed rate and SIBOR +1.25 per cent.  It means the SIBOR-plus rate would still not be the cheapest.

Of course, this rate should not be compared only within DBS.  Again, the lowest rate is Maybank's 3.18 and 3.38 per cent for a variable-rate home loan with a 2-year lock-in.  Again, the DBS pegged rate is higher.  It is 0.75 per cent more than the Maybank first-year rate and 0.55 per cent more than the second-year rate. 

8) Fixed rate loans have drawbacks.

Benefits from refinancing fixed-rate loans with variable loans can be even greater.  It is because fixed interest rates are about 0.5 per cent higher than variable rates. 

Not only are variable rates cheaper, they also work to your advantage in periods of steady or falling rates.  

When interest rates are falling, you are better off not to lock into an expensive fixed-rate mortgage.

9)  When refinancing, expect your bank to become more helpful.

Refinancing doesn’t put you on bad terms with your bank.  To the contrary, you can expect your bank to become more friendly and helpful when you tell them you intend to refinance your home loan. 

It is because they don’t want to lose your business.  To keep you as a customer, the bank will likely propose an attractive refinancing package.

When staying with the same bank, the usual terms are “re-pricing” or “converting” your home loan.  If you switch your loan to another bank, it is typically called “refinancing”.

10)  Be a tough negotiator.

Competition works.  The bank will offer more to keep you as a customer if they know you are serious about switching.

When the bank has made its “final” offer, ask for more.   Try specific demands such as a lower interest rate, no re-pricing charge and a shorter lock-in period.  

If the bank says “No” then walk away.  You can always look for a better deal.

Another good strategy is to refinance with a group of friends.  If a bank is vying for 10 customers instead of one, it is likely to offer a better home-loan package.  

11)  Go for a 1 or 2-year lock-in period.

Your choice for variable-rate home loans is a 0, 1 or 2-year lock-in. 

There is not much advantage to a zero-year lock in.  Rates usually do not go up so quickly that you would benefit by refinancing within a few months after taking the loan. 

A one-year lock-in offers adequate flexibility and is cheaper than a 0-year lock-in.   A variable rate with a two-year lock-in has the lowest rates.  

Generally, banks charge lower rates for longer the lock-in periods.

12)  Beware sales pitches.

“Free partial repayment” within the lock-in period sounds like something special. 

But it is not since all banks offer it.  The drawback – a big one -- is that you cannot finance partial repayment with a bank loan.  You must make partial repayments with cash or CPF money.

In general, beware fancy loans with complex terms.  It is almost always cheaper to go with the basic, simple loans such as a variable interest rate with a 2-year lock-in.  These plain vanilla loans are easiest to understand and usually the least expensive.

Be especially wary of one-time offers.  The latest marketing gimmick is for banks to tell customers about “special offers that have not yet been made public”.  These deals are supposedly reserved for special customers like you.

While it is correct that the offers have not been advertised, they are often complex and usually turn out to be more expensive than the bank’s standard variable-rate home loans.

13) All banks use "monthly rest"

The Consumer Guide to Home Loans written by the Association of Banks of Singapore (ABS) explains two ways of calculating interest.  One is monthly-rest (good) and the other is yearly-rest (bad). 

It explains that the yearly rest method is unfair since “installments and interest computations are done on an annual basis, although customers make their repayments on a monthly basis.” 

As a result, “the effective interest rate is higher than the advertised rate”.   It means the bank could advertise a rate of only 3 per cent but you could be paying much more, like 5 per cent.

Consumers who called their bank to see which of the two methods it uses were told their bank charges “monthly rest” (good).  It is reassuring.

How can one be so certain that all banks gave that answer?  Because every bank charges monthly rest.  None charge yearly rest. 

It is an important detail which banks don't mention. The new Consumer Guide to Home Loans explains the difference between monthly and yearly rest.  But it makes no mention of the fact that no Singapore bank uses yearly rest. Banks here have not used it for decades.

Therefore, you should not consider it a big plus (or even a small one) when your bank informs you that it uses monthly and not yearly rest to calculate your home loan interest.

14) Current-linked accounts offer minor advantages.

Current linked accounts (CLA) link your current account to your home loan.  You receive the same interest on your current account as you pay on your home loan. 

If your mortgage is say, $200,000 and you have $200,000 in your CLA, the interest earned on your deposit will offset the interest paid on your loan.   It means your home loan is free.

The problem comes if you have less than $200,000 in your CLA.  Then, you must pay an interest rate on your CLA mortgage and it is often higher than a regular mortgage. 

Four banks offer CLA.  Two of them do not permit deposits of CLA up to the full amount of your mortgage.  Three of the four banks offering CLA do not offer it for fixed rate home loans or for HDB loans. 

Citibank is the exception and offers CLA automatically as part of all Citibank home loan packages.

A second drawback of CLA is that you can earn almost as much in a money market fund.  A money market fund may pay 3.2 per cent. The CLA may offset a home loan interest rate of 3.5 per cent.  The difference is a savings of 0.3 per cent, which is rather minor. 

One small advantage of CLA over a money market fund is that it offers the convenience of a checking account.

15) HDB is better than bank loans

There is no comparison.  HDB concessionary rate loans are almost always lower than bank home loan rates and the terms are more flexible.

Surprisingly, however, the trend has been away from HDB loans to bank loans.  The CPF web site shows the Household Sector Balance Sheet for 2000 to 2005. 

In 2000, mortgage loans made up 72.4 per cent of household liabilities -- (with personal and other loans making up the rest).  Of that amount, 29.7 per cent were bank loans and 42.7 per cent were HDB loans.

In 2005, mortgage loans made up 73.9 per cent of household liabilities -- (not much change).  Of that amount, however, bank loans had increased to 39.4 per cent while HDB loans dropped to 34.3 per cent.  The proportion of HDB loans had dropped while bank loans had risen.  (One reason may be a relatively larger proportion of private property sales in recent years.)

Regardless of the reason, borrowers should keep in mind that they are nearly always better with an HDB home loan and should take it if they qualify.  HDB loans have these 4 advantages:

i.  HDB is considered to be more helpful should you hit on hard times and default on your home loan.  

ii.  HDB adjusts interest rates slowly. This is helpful when rates are rising. 

iii.  HDB loans give you flexibility. It is easy to take an HDB loan then switch to a bank loan.  But you cannot take a bank loan and later refinance it with an HDB concessionary rate loan. 

iv.  CPF rules require that bank borrowers pay 5 per cent of an HDB flat’s purchase price in cash.  HDB loans do not have this cash requirement.