The basics about the biggest bank loan you’ll ever take

When PropertyGuru approached us to create this content; we thought we’d cover the most common dilemmas when it came to taking on a mortgage (or home loan).

But as we found out on IG, there’s a lot of confusion surrounding the term ‘mortgage’, especially if you haven’t bought a home yet.

So, here’s a quick explainer before we dive deeper.

You see, there are two common ways to use the word mortgage:

1. Noun: When you get a mortgage, you are getting a loan for your home. You can use the word ‘mortgage’ interchangeably with a home loan.
   

   
   “I just got a mortgage for my HDB.”

    

2. Verb: When you mortgage something, you’re using your home as a guarantee that you’d be able to pay off some form of debt. If you can’t pay off said debt, you lose your home. 

“I have to mortgage my home because I am in massive massive debt.”

This article is about the (1) noun, not the (2) verb. Unless you’re playing monopoly, the regular Singaporean who lives in a HDB flat won’t be using it any time soon. 

How you should view a mortgage

Suppose you want to buy a home that costs $400,000.  

Of course, most of us don’t have $400,000 lying around to pay the seller immediately.  So you’re going to have to borrow some money to pay the seller.

This money that you borrow is the mortgage.

You pay money to borrow the mortgage, this is called the interest (and it’s how banks earn money from you).

Of course, banks won’t let you borrow 100% the $400,000.

That’s why you need to put down a deposit, aka a downpayment (10% or 25%) before they actually loan you the rest of your money.  

Now that you know what a mortgage is, it’s time to answer the most common questions about mortgages out there. 

How to qualify for a mortgage

Would you lend your life savings to someone who has a bad gambling addiction and no income? Unless they’re your close friends and family, your answer is probably no, because the chances of getting that money back are slim.

Banks kinda work the same way, but they have a more systematic way of making sure you can pay back. 

For most people, it boils down to two things (if your life situation is more complex, there will be more factors involved) 

The first is your Credit Score – which is a summary of how good you are at  borrowing and returning money. 

Some simple ways to have a good credit score:

• Having a credit card and making punctual payments on it
• Paying all your debts on time
• Having a personal loan and then paying it on time as well.

(This is an exhaustive list, read more here):

The second is Income.

The main things you should understand are: 

• Higher income means higher loans
• All things equal, being self-employed or unstable income means you get to borrow less compared to an employee with a full-time job
• Your other debts (student, business, personal, credit card) will also be taken into account. Altogether, they cannot exceed 60% of your income. 

Fixed or floating?

The next question you need to ask is what type of loan to take. Like picking your starter Pokemon, there isn’t really a ‘best’ choice, just trade-offs. 

The broad overview: 

Fixed interest rates lock in the current interest rates for the next 2-3 years. They will be higher than your floating rates, because you’re paying for stability.

Floating rates generally have lower interest rates than fixed loans, but may be adjusted higher and lower, depending on the stuff like government policy, supply and demand etc etc. The adjustment happens every 1 – 3 months.

(It should also be mentioned that there are three types of ‘floating rates’ as well; and each one is pegged to a different indexes (SIBO, SORA etc); we’ll talk about this another time.)

To make it simple, you can approach it this way: 

• If you think interest rates will go up, choose fixed interest rates.
• If you think interest rates will go down, then go with floating interest rates.
• Look at the price difference between fixed and floating, and see if you’re willing to pay that amount for stability

If you’re in a good place financially, we think it makes more sense to take a little risk and seek a better interest rate. Why? Because even if the rates do increase, you can afford it. 

If you think about it, this is quite similar to the path to financial freedom. 

Before you invest, you need to save. Before taking risks, you need holding power.

Ps: We covered HDB vs Bank loans in another comic, the TWS guide to buying your HDB flat

Stretch or rush?

Mortgages can be as long as 30 years (25 for HDBs), or as short as 5-10 years.  And once again, they have their pros and cons. 

Now, it’s true that if you stretch out your home loan, you pay more interest.

A loan of $375,000, when rushed over 10 years, incurs only $25,106 of interest. 

When stretched out to 30 years, the interest is $78,067. That’s a $52,961 difference.  

But hang on, that doesn’t mean rushing to pay off your loan is better. There are two things to consider here:

The liquidity aspect: Paying it off as fast as possible is great for reducing stress, but it also means larger instalments. Affecting your cash flow and your emergency fund…which might also cause stress. There’s some balance to be struck here. 

The investing aspect: The money you could have made from investing the extra $$$ you put it to rush your loan. So instead of putting $2,000 in your mortgage, you can drag it out to make $1,000 instalments, while investing $1,000 a month.

You can use a calculator such as this one to see whether it makes sense for you to invest or pay off your loan first.

Refinance or not?

‘Refinancing’ a loan is kinda like going to get a new loan all over again from another bank. 

How much can you actually save by refinancing? Well, you can use a mortgage calculator like this one to find out. 

However, don’t be too happy yet. You see need to deduct the fees involved with refinancing, including: 

•  Valuation fee ($200 – $250)
•  Legal fee  ($1,500
•  Early redemption fees
• Clawback fees (if your existing bank gave you a subsidy on your existing mortgage, you will be required to pay this back) 

We won’t go into them so much, but what you need to know is that once you take these into consideration, you won’t always be saving as much money as initially thought. 

Generally, if you don’t have at least $100,000 left on your mortgage, it’s not worth financing.

The price of your home is still the most important

You can geek out whether or not your mortgage is stretched or rushed, fixed or floating, sure. But in our opinion, the single most important factor to consider is the cost of your home.

That is why we must stress that just because you can take on a big mortgage, doesn’t mean you should. 

You see, once you’ve already committed to it, an expensive mortgage, there is very little you can tweak with your mortgage to make your life more comfortable (apart from selling your home, of course).

The last thing you want to do is to buy a home that puts you through financial difficulty for the next few decades. Knowing you have an insurmountable debt is a sure-fire way to diminish your quality of life. 

After all, a home is a place that you’re supposed to feel safe in, not be threatened by.

Stay woke, salaryman.

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