Rule 1. The Price of Money
It’s been said that a bank is arguably more dangerous than a standing army, but where else can we go when we want to borrow money? Unless you have a sugar daddy/mama, you don’t have much of a choice.
The cold truth is: it’s a bank’s job to lend so their payment is earned through charging interests and fees. Interest is the price of money, and the price of money can be very high.
Rule 2. The Monthly Instalments Recipe
There are four things to look out for when calculating your monthly mortgage payments:
- Loan Principal: The more you borrow, the more interest you’re going to pay: this is a fact.
- Interest rate (BLR/BFR plus/minus x%): Most variable rate loans are pegged to the Bank Lending or Finance Rate. Banks used to operate solely on a plus x% BLR system but when tough times came, rates were reduced to minus x%. The math is simple: the bigger the minus x% or the lower in plus x% in your equation, the lower your interest is going to be.
- Duration of loan = tenure. The longer you take to pay off your loan, the more interest you’ll pay.
- Interest Calculation – daily-rest, monthly-rest, or yearly-rest. This is an important one: it’s HOW the interest is calculated that makes a difference to the cost of your mortgage because of how the rate is compounded. The more often interest charges are computed, the lower the amount of interest is paid over the loan tenure. It means that for the same interest quotes, the total interest payable is lower in daily-rest than monthly-rest or yearly-rest. Everyday makes a difference!
Rule 3. The Golden Ratio
Your monthly installment pays off two things, your interest and your principal: For most home loans, the first ten years you will be paying about 80% on your interest and 20% on your principal every month.
If you could pay off your principal faster you’d pay less interest and own your home faster. Flexi mortgages allow you to pay extra on your principal whenever you want.
Flexi mortgages can save you a lot of money.
Rule 4. Fees, Fees, Fees
This is unavoidable. When you buy a property, you need to have two procedures completed: to transfer ownership of the unit from seller to you and to mortgage your property to secure a housing loan. To help you achieve this, the lawyers will charge you an arm and a leg. There will be two legal fees to pay; the fees on the execution of the Sale and Purchase Agreement as well as that of the Loan Agreement which will be prepared by lawyers commissioned by the bank. The bank will bear the cost of the latter agreement first but the amount will then be deducted from your loan. For the Sale and Purchase Agreement, you will need to source your own lawyer. For new properties, developers frequently arrange to have this done at no charge as part of a ‘package’ to entice you to buy their property. As such, do check with your developer what they are willing to offer before forking out more money.
There will also be fees for the Memorandum of Transfer of the ownership of property and valuation fees to determine the true market value of the property.
You also need to get a fire insurance and it is advisable to buy a MRTA (Mortgage Reducing Term Assurance). Try avoid including these fees into your loan if possible. Remember Rule 2, the higher your principle is, the more interest you pay.
Rule 5. Knowledge is Your Friend
Do thorough research – you’ve done well considering you’ve stumbled upon this article! Something as abstract and alien as home loans may become understandable with enough research. You may also be surprised if the bank has offered an interest rate different from what is published online, so do not treat everything you’ve read as gospel until you’ve actually talked to a bank representative.
ALWAYS make an effort to put your chin up and talk to the loan officer to negotiate! You may get lower interest rate as much as 0.15% if you have a good credit rating, something you wouldn’t know if you didn’t do some homework of your own. Additionally, utilise a loan calculator spreadsheet online to tabulate different scenarios like excess repayments and different loan period and compare.
If you are going to pay 40% of your salary towards your mortgage for the next 30 years, it’s worth the extra time for you to fully understand what you’re heading head first into.
Rule 6. Read the Fine Print
Remember those tiny asterisks? Well, in a loan documents, you will get a few. Always watch out for the terms and conditions. Remember Rule 1 and Rule 4? There are a million and one hidden fees that you might encounter once you take up a loan. You pay to have an auto deduction from your saving to photocopy any security documents that the bank insists to keep for your behalf, and even when you request for an additional loan statement.
To withdraw the money from EPF to reduce your loan, you need a letter from the bank to verify it and yes, you also need to pay for it. When settling your loan early, you need the bank to tell you how much the outstanding balance is and the figure in your current bank statement won’t do, the bank insist to issue you this letter (they call it redemption letter) and guess what? You will have to pay for that too.
Rule 7. Repayment Discipline and Beware the Repo Man
Banks can and will charge you overdue interest rate of 1% to 3%, if you are late on your installments, even if it means being 1 day late. Each default will have a rollover effect and will be added into your outstanding principal, increasing the total interest you will be paying. See Rule 2.
The bank can and will repossess your property if you fail to pay your loan instalments. It’s their right and it is stated in the loan documents. You can however, negotiate for a payment holiday with the bank if you really cannot afford the instalment for that month. But as stressed in Rule 1, it will cost you! Somebody is going to pay… and it’s won’t be the bank.
Rule 8. Don’t Hesitate to Negotiate
You can negotiate with the bank to reduce your loan interest rate or revise your loan package after a few years. If you have solid proof that another bank can offer you a better rate, ask your bank to consider reducing theirs. This will require you to have an existing relationship with your bank, as it is easier for them to track your financial records. Note: some bank charges you a fee when you make such requests! See Rule 4.
Always remember, you can switch your loan to other banks or different packages within the same bank. Just remember to factor in the fees and charges like legal fees and stamp duty.
Rule 9. The Importance of Documentation
Always ask for written documentation from the bank officer before you agree to take the offer. To avoid misunderstanding, don’t rely solely on verbal communication given by the bank staff. See Rule 1.