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Everyone knows that it is a major financial decision to buy a home because of the amount of money involved in the transaction. Even the legendary Warren Buffett has said: "When people are making the decision of the magnitude of buying a house, it's the biggest decision a great many families will ever make." At the same time, the residential property market in Singapore is pretty moribund right now. Consensus opinion, though admittedly often wrong, is that prices are unlikely to move higher in the near term.
However, there are good reasons other than potential capital gains, for buying a home. Getting a fixed rate mortgage to hedge against inflation is not a bad idea. The concept is that as inflation rises, the value of the debt on the property will fall, and it will become easier to pay off the mortgage. Of course, wage inflation would be as desirable as price inflation! And it does provide a roof over your head. So let us assume you have decided to take the plunge and have made the decision to take out a home loan. In this article we provide 5 simple tips for making the home loan process a bit less stressful.
1. Make sure you can afford it
As a general rule, your monthly debt commitments should not account for more than 35% of your monthly income. In addition to the mortgage, debt commitments will include any car loans, study loans or other personal loans and credit cards (which must be paid off in full at monthend). A way of making the monthly debt payments more affordable is to lengthen the maturity of the loan, but remember that doing this also increases the total amount of interest you must pay over the life of the loan.
2. Always have a contingency plan
Depending on the home you are buying and your particular financial situation, the monthly repayments will vary. You should be aware that if you ever default on your monthly repayments, the bank has the right to repossess your home. Not only would such a situation be distressing to you, but family members living under the same roof will also be affected. This is why you should always have extra funds available to allow for an increase in interest payments as a result of a rate rise, or if you lose your job.
If you have dependents living with you, and you are the sole breadwinner, you should certainly consider getting mortgage insurance as well. The policy is commonly known as Mortgage Reduced Term Assurance, and will help to partially or fully pay off any outstanding home loan should you be unable to fulfil your home loan obligations due to death or disability.
3. Think carefully before you decide whether a fixed or floating rate is better
Many borrowers focus simply on getting a loan that offers them the lowest interest rate. However, it does not follow that lowest is necessarily always best. It is worth considering whether a slightly higher fixed rate might actually suit your particular financial circumstances better. If you have access to more funds in case interest rates were to rise, then the lowest floating rate may indeed be the best. But a fixed payment per month might possibly be a worthwhile option for better money management. And If you are buying an investment property, you may want to choose a fixed rate loan so that you can have better control over using the rental income to cover your mortgage payments.
4. Use a mortgage broker
Most Singaporeans will be well-acquainted with comparing credit cards online using various financial product comparison websites. However, not so many are as familiar with comparing mortgage brokers when it comes to finding the ideal home loan. There is a misconception that a home loan will cost you more if you go through a mortgage broker. In fact, mortgage brokers earn their money by getting a referral fee paid by the bank which you have chosen for the loan, so in fact you do not pay any extra. Because mortgage brokers are product experts in their field, they have a wealth of knowledge, and can recommend the best bank loan product which is suitable for you.
5. Always refinance
In previous generations, steadily paying off the same home loan over many years was the ‘done thing’. These days, however, such loyalty is not rewarded by any bank. Indeed, the capitalist model currently rewards new customers exclusively, and it pays to constantly shop around and refinance. It is a fairly simple process to replace your current home loan with one that charges a lower rate of interest, and therefore lower monthly repayments. You should do this every few years. Do take note though, of any fees, penalties or claw-back of benefits involved since they may outweigh the savings from refinancing.
