Bank Loan Information

Types of Bank loans
There are many different types of mortgage packages available in the market today. Here, we highlight the different types of packages and features that banks currently offer in Singapore. Some mortgage packages have a combination of the features highlighted here.

Capital and Interest Mortgage
This is the standard mortgage package. Monthly payments are made towards paying both the interest and the principal. Each monthly payment is equal, so in the early years of the loan term, a larger portion of the monthly payments goes towards interest payments. And the principal payment portion gradually grows larger over the loan term. At the end of the loan term, the debt would have been fully repaid.

Cash Back Mortgage
In a cash back loan, the lender gives a portion of the loan back to the borrower in cash. In such an arrangement, the borrower is typically tied to the loan for a certain lock-in period.

Combo/Hybrid Mortgage
A combo/hybrid mortgage allows you to divide your total mortgage loan into separate portions and apply a different loan package to each of them. It could for example, be a two-part loan with one part based on a fixed-rate package and another part based on a floating rate package.

Interest-offset Mortgage
Recently many banks have started offering interest-offset packages where you can get the same interest rate on part of your deposits that you can use to pay for your mortgage loan. Typically the ratio is 2/3 of your deposit, so it doesn’t fully offset your mortgage interest amount. The remaining portion of your deposits will have a lower interest rate. This is to attract people who have a lot of cash sitting in the bank with very low deposit rates.

Interest-only Mortgage
As the name implies, there are no principal payments during a part or the whole loan term and the loan balance remains unchanged during that period. The monthly payments are used only to pay for the interest. The full loan principal is then paid off at the end of the loan period - or typically the loan is just refinanced.

Fixed Rate Mortgage
For somebody who wants to be sure exactly how much his/her monthly payments will be and not worry about interest rate changes, there are fixed rate home loans packages available. Fixed rate packages offer a fixed interest rate for a certain period, after which it becomes a floating rate loan. Fixed rate loans also typically come with a lock-in period and early repayment penalties.

Fixed rate packages in Singapore are only offered up to a 3 year period, so the types of 20 or 30-year fixed rates packages offered in many other countries are not available here.

Payment Holiday Mortgages
This is more of a loan feature than a loan type itself, but many loan packages offer a possibility to take a break from monthly payments sometime during the loan term. This can be, for example, 1 or 2 monthly payments every year.

Variable Rate Mortgage
In a variable rate housing loan, the interest rate can fluctuate during the loan term. The interest rate is calculated based on a reference rate and a margin. The reference interest rate is either bank’s internal lending rate a.k.a SIBOR. If the reference rate is SIBOR, the loan interest rate is adjusted every 3 or 12 months (depending which SIBOR the loan is tied to). If the loan is tied to bank’s internal rate, the bank usually gives at least one month notice to borrower. Variable rate packages can typically be repaid early, except in cases where the margin is lower for a given lock-in period.

Refinancing has become a viable option for many existing home owners with high interest rates on their current mortgage. Refinancing is essentially a "replacement loan" from a different lender and (hopefully) a lower interest rate.

Why should I choose to refinance my home?
• You may be able to take advantage of lower interest rates.
• You may be able to extend the repayment period of your mortgage. While you will end up paying more in interest charges, this will reduce your monthly outgoings.
• You may be able to switch from a variable rate to a fixed rate mortgage, giving you greater security in the future from potential rate increases.
• You may be able to increase the amount of your mortgage to pay off other higher interest rate liabilities such as credit card debt, cell phone debt and personal loan debt. This will enable you to cut steeper costs incurred from other higher interest rate charges.

(For more reasons behind refinancing, please read: Reasons to Refinance Your Home Loan .)

What should I take note of when refinancing my home?
If you decide to borrow more than your existing mortgage, you need to be wary of your budget. If you default on your payments, you run the risk of losing your house. If you do not calculate the costs involved with refinancing correctly, you could end up paying more in interest charges.
Thoroughly review the contract of your existing loan, an early pay out could involve a penalty that would negate the benefits of refinancing.

(For more reasons against refinancing, please read: Reasons NOT to Refinance Your Home Loan .)

What will it cost me to refinance my home?
Refinancing does carry some costs that you need to be made aware.
• Valuation Fee – The payment for a professional appraisal of the value of your house.
• Credit Report – A payment for an assessment of your credit health
• Escrow – A payment for money transferred by a third party.
• Lender Fees – Any other fees that are incurred by using a particular lender

Am I eligible for refinancing?
Applying for mortgage refinancing is just like applying for another loan. There is a set criteria for acceptance. Every missed mortgage payment will count against you in the application, either resulting in a higher interest rate or a rejected application.
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Victor Ho
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