1) A home loan is the cheapest loan you will ever get. As such, don’t pay it off early.
Your strategy should be to (i) borrow as much as possible (ii) for as long as possible and (iii) pay it off as slowly as possible.
Be sure that you pay all other borrowings before paying down your home loan — (since all other debt is more expensive).
2) No bank announces that the lock-in has ended and rates are going up. None informs borrowers there is a way to avoid the automatic rate increases — and lower payments to the bank.
3) When you move your home loan to another bank, it is called “refinancing”. When you keep your loan at the same bank, it is called “re-pricing”.
After the lock-in has ended, do one or the other — refinance or re-price. Continuing with loan after the lock-in period is almost always more expensive if you refinance or re-price.
4) It is often worthwhile to re-price with the same bank to avoid legal and other fixed costs from switching.
Tell your bank you intend to re-price. You may be surprised by the bank’s attitude. It will not be offended. It will usually become more friendly and helpful since they don’t want to lose your business. To keep you as a customer, the bank is likely to come up with an attractive re-pricing package.
5) You get the lowest rates by bargaining. Two good ways to increase your bargaining power are: (i) Don’t refinance alone. Do it with a group of friends. (ii) Shop around. Show banks the lowest rate you find — and then ask if they can improve on it.
6) Nearly all banks are willing to go lower than their published rates. Most acknowledge that their quoted rates are “subject to negotiation” and “the relationship manager may be able to lower rates further”.
7) Variable and fixed-rate loans are pushed by the banks but are almost always more expensive than pegged loans, which are typically pegged to Sibor or Sor. They are easy to understand, transparent and almost always the least expensive choice.
Variable rates are especially tricky. They are not truly variable since they rise but do not fall with market interest rates. This is not disclosed by the banks.
8) Be especially wary of one-time offers. A marketing gimmick is for banks to tell customers about “special offers that have not yet been made public”. The 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 more expensive than a simple pegged-rate home-loan.
9) A common sales pitch is “free partial repayment” within the lock-in period. It is not as special as it sounds since you cannot finance the partial repayment with a bank loan. You must make the payment with cash or CPF money.
10) Bank loans can be as much as 1 per cent lower than HDB’s 2.6 per cent rate. It makes HDB loans look expensive — and you will pay about $1,000 more per year for a $100,000 HDB loan — (2.6 vs. 1.6 per cent). Still, some people may find an HDB loan is worth the extra cost because of these advantages:
i. HDB is considered more helpful should you hit on hard times and default on your home loan. Unlike banks, it won’t foreclose on a property.
ii. HDB adjusts interest rates slowly, which is helpful when rates are rising. HDB rates haven’t changed for the past 10 years.
iii. It is a one-way street since you can switch from an HDB to a bank loan but not back again.
iv. CPF rules require bank borrowers to pay 5 per cent of an HDB flat’s purchase price in cash. HDB loans do not have this cash requirement.
v. HDB permits 90 per cent loans. With banks, you must borrow 80 per cent or less to get the bank’s best rates.
Interesting statistic: About 50 per cent of HDB home loans are financed by banks, 40 per cent by HDB and 10 per cent are paid by cash.