Bank Clauses in Housing Loans

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Most purchasers of property in Singapore rely on the bank to help finance the purchase of their dream home, office, shop or warehouse. In exchange for the money from the bank to buy that dream property, owners mortgage their properties to the bank. This relationship between the property owner and the bank usually lasts 20, sometimes 30 years. Most borrowers are concerned with the amount banks are willing to lend on the property and whether, on the basis of their income, they qualify for the loan. But how many actually look at the fine print.

In this article, we look at 10 considerations a prudent purchaser should take into account when deciding on which bank they wish to borrow from.

1. Interest Rates

This is a foremost consideration. Most banks boast of “promotional rates” for the first three years. A prudent borrower should note that some banks “fix” these rates while others peg the rates at either a discount off a published housing loan rate or a markup from the bank’s prime rate. Which scheme the borrower chooses depends on how he expects the interest rates to move in the future. What then of the interest rate after the “promotional” years? This will be an important consideration if the property owner does not anticipate disposing the property within 10 years of its acquisition. Most banks peg the rates at a discount off their housing rate or at a markup from their prime rate. Almost no bank will fix the interest rate for a loan beyond the first five years. In order to ensure that you get the lowest interest rate for your housing loan when deciding which bank to use, it is important for you to investigate the bank’s housing and prime rates at various times in the past as compared with other banks at the corresponding times.

2. “Promotional” Rate Commencement Date

Although the bank might advertise a “promotional” rate for a fixed number of years, most banks commence the “promotional” term from the time they approve the loan. So , if a purchaser is buying a property which is still under construction, by the time he actually uses the money from the bank, a substantial part of the promotional period would have lapsed. This is because for these properties, cash money and CPF funds will be utilized first before the bank loan is issued.

3. Early Redemption  Penalty

To a bank, committing to a housing loan means setting aside a large sum of money for a long period of time in return for a competitive rate of interest. Much paperwork is also involved. As such, almost all banks will impose a penalty for borrowers repaying the loan and redeeming their mortgage within the first few years. Typically, the penalty is set at 1 per cent of the housing loan amount if the loan is redeemed within the first two years. However, it is common practice that banks do impose a longer/higher penalty if their promotional package is especially attractive.

4. Penalty Commencement Date

Contrary to the commencement date of the “promotional” rate, the penalty term usually commences only upon the first disbursement of the loan, which usually occurs about three months after the loan offer date (completion of legal documentation) or some years on for properties still under development. Some banks even “refresh” the penalty term upon each disbursement, as in properties still under development when money is disbursed for progress payments.

5. Partial Redemption Penalty

Most banks will impose a one per cent penalty for partial repayments of loans. Also, a three month advance notice must be served on the bank, otherwise, interest will be imposed on the short notice. For upgraders (who are expecting to repay part of their loans from the sale proceeds when they sell their present property) to avoid paying this penalty, it will be wise to arrange a two-tier term loan, one for the entire duration of the loan and the other for a shorter term.

6. Fire insurance

It is often a term of the housing loan to insure your property against the risk of fire. Most banks offer an insurance policy covering this risk for free in the first year.

7. Compulsory Personal Insurance Policy

In the past, banks require their borrowers for housing loans to purchase a life insurance policy to cover the loan amount. But that was a long time ago. Most banks now impose this requirement sparingly, usually on a case by case basis, depending on the age of the borrower although certain financial institutions still impose this as a regular practice.

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