Buying a home is one of the biggest purchases you will make in your lifetime, so it's important to do your homework before you apply for that loan.
# Prepare in advance
You must pay at least 1 per cent of the purchase price in exchange for an option to purchase. After that, you have 14 days to decide whether to proceed with the deal and pay the balance of 9 per cent for a completed property or 4 per cent for one under construction.
At this point, consult a mortgage specialist about financing. Mortgage documentation takes about 10 to 12 weeks to complete, so apply early.
Note that most banks charge a cancellation fee of up to 1.5 per cent on the loan amount if you pull out later.
Banks determine the maximum loan amount by applying a debt servicing ratio of between 30 and 35 per cent of your monthly income.
Therefore your total monthly repayment should not exceed this ratio when compared to your monthly income. Other commitments, such as a car loan, will be taken into consideration as part of your monthly commitments.
# Select your loan tenure
Generally, the maximum loan tenure is 35 years, but it depends on the borrower's age. In the case of joint applicants, the maximum tenure will be based on the age of the youngest borrower as long as the loan tenure plus the age of the youngest borrower does not exceed 70 years on loan maturity.
For example, if a borrower wanted to select the maximum loan tenure of 35 years, he must not be more than 35 years old.
Here are some useful tips:
# Choose the right package according to your needs
Most banks offer three types of home loan packages: fixed-rate, variable-rate and market-pegged packages.
It is important to understand your needs and intentions before you decide which package suits you.
A fixed-rate package is suitable for those who want peace of mind as during the fixed-rate period, there will be no rate volatility.
But it is not recommended if you want to make a partial prepayment or full settlement during this period as there will be penalties.
A variable-rate package is one where the rate is pegged against the bank's reference or board rate. This allows the borrower to make prepayments.
If you have a good understanding of market-pegged rates and you do not mind rate movements, go for the market-pegged package.
The rate offered by banks in Singapore is generally pegged to the Singapore Inter Bank Offer Rate (Sibor).
It also allows you to make loan prepayment without penalty for no lock-in packages on specific rollover dates.
# Get mortgage insurance for protection
Mortgage insurance - or Mortgage Reducing Term Assurance - covers the home loan balance in the event that the borrower dies or is totally and permanently disabled.
Although not compulsory, it is recommended. If an unfortunate event strikes, the loan repayments will be covered by the insurance.
Have difficulty in your repayments? Talk to your bankers. Late charges or non-repayment penalties are but a deterrent for non-payment. More importantly, promptly seek help in managing an overdue debt.
Banks try to help customers work through such difficult times. It might include allowing customers to pay only the interest portion of the loan for a short period, stretching the loan period so as to reduce the monthly repayment amount.
Help might also come in the form of allowing borrowers to include a second loan applicant to help service the initial loan.
It is not in the bank's interest to foreclose on home loans. We advise customers who have loans to pay off and are close to running into the risk of not being able to make payments, to speak to their bank officers before their situation gets worse.
The writer is OCBC Bank's head of secured lending.
Source: Sunday Times, 18 Jul 2010