We recently shared the 7 Secret Bank Policies that could increase your chances of obtaining an approval for your loan application. Today, we will explain more about the 10 mortgage features that are available in the market. On the surface, home loans can appear to be seemingly straightforward products – you take a loan for your property which you pay off over the stipulated tenure. However, home loans usually comprise of large quantum, which collectively pose significant risks to the lender if there were no safeguards / strategies in place.
Let us walk through these 10 features of a mortgage loan to aid you in making long-term decisions over the lifespan of your mortgage!
1. Short or no lock in period
Most mortgages come with a minimum lock-in period of 2 years. This usually relates to borrowers being contractually bonded for 2 years in exchange for a more competitive rate during the lock-in period. Any changes typically would be subjected to a penalty or fee.
However, some loans do not come with a lock-in period but with higher interest rates – but why would you want this?
There are times when borrowers are planning a sale or looking to down pay their loan after receiving proceeds from a windfall/investment. Not having a lock-in period allows you to repay your loans with the proceeds from the sale/investment without incurring penalties which typically is around 1.5% of amount paid.
The next reason is that a borrower might be able to release your pledged assets. In our article covering the 7 Secret Bank Policies, we highlighted that pledged assets can sometimes be used as a proxy for a steady stream of income. Having a shorter lock-in period allows you to free these pledged assets earlier, granting you greater flexibility.
Having a shorter lock-in period also gives you better flexibility in your decision to refinance. This usually occurs with changes in bank offerings throughout the economic cycle. For example, a borrower opts for a floating rate loan, but a year later, the economy appears to be approaching an uptrend. If the existing home loan does not have a lock-in period, he can easily refinance and opt for a new loan, preferably one with a fixed rate to hedge against rising rates.
The result is that for the same given tenure, a borrower is able to cap their monthly payment on the loan! Any excess funds can then be reinvested in assets which produce returns over the interest rate of the loan or can be spent at the borrower’s discretion.
2. Free conversion
Most banks offer the option of converting existing loans free of charge as a deal sweetener. Typically, most mortgage packages come with the option of 1 free conversion. Mortgages on Building Under Construction (BUC) however, come with 2 free conversions, helping the buyer overcome any lag in the market.
These free conversions are usually only made available after 1-2 years of servicing the loan, or after the lock-in period has been completed.
However, some banks even allow this conversion to be exercised at any time! In which case, you can effectively convert your loan which may impose a lock-in period, to one that does not. Having the ability to exercise this free conversion at any time is therefore the most useful, since it would be in your favour to adopt a suitable package when you determine that the economy is beginning to wane / rise.
Since no one can predict interest rate changes, this offers a greater degree of flexibility.
3. Partial Prepayment
A partial prepayment refers to the ability to pay down a portion of the entire home loan before lock in (contract period) ends. This effectively exposes you to lower absolute interest payments and hence, lower monthly repayments for the remaining tenure of the loan. The decision to do so depends entirely on your financial goals.
Paying down a part of the loan can relieve some of the burden of monthly payments in the future. However, with excess funds available, some may argue that it would be better to invest in assets which grant returns that could offset some of your monthly payments. This could also serve as a hedge to interest rate risk in a rising-interest rate environment.
Certain loans allow partial prepayments, or early repayment of the loan. Do speak to your mortgage advisor to align your long-term goals with the right mortgage!
4. Interest Offset Account
Something important to note is that this feature is only available for floating rate packages. An interest offset account offers you the same interest as your mortgage. This works similar to a bank account, allowing you to earn an interest equal to that of your mortgage or bank balance (Varies with bank).
Through which, you are able to retain liquidity, reduce interest payment – All whilst waiting to pay down on your loan or making a move in the market.
5. Waiver of Penalty Due to Sale
Consider a mortgage with a lock-in period of 2 years – when the market is at an all-time high and you believe that it is the right time to sell your property for a healthy profit. However, breaking this lock-in period subjects you to penalties – a cancellation fee of 1.5% on the outstanding home loan.
Assuming a loan of $1,000,000, the penalty amount would be $15,000. In the grander scheme of things, this amount may seem not as significant as opposed to your total proceeds. But having more savings is always better than having less.
Some banks do provide waivers for this penalty embedded within their clauses. However, it is important to note what prerequisites must be fulfilled before this can be made available to you.
The advantage of having a waiver of penalty in the case of a sale is that we can achieve added flexibility. Loans with lock-in periods typically impose lower effective interest rates as compared to those without. Having the waiver allows you to retain that flexibility to sell your property any time without being subjected to a lock-in period, while paying lower interest rates.
Speaking of which, who could possibly predict the exact best time to sell their property? This waiver allows us to make informed decisions on the sale of our property without fearing penalties.
6. Fresh Funds
Banks always look on fresh funds favourably. After all, the business of a bank is to loan out fresh funds within their borrowing limits, which comprise of their deposit accounts.
Having a larger amount of fresh funds in your account may reward you with lower mortgage rates. Preferential clauses may also be offered in your home loan to acquire / retain you as a customer. On top of which, you may be accorded premier banking status, the baseline of which varies from bank to bank. Inflow of fresh funds may render you a “welcome gift” of additional cash, usually after leaving these funds above a certain baseline for a given period.
However, there lies the downside of using fresh funds to your benefit. These funds are sometimes required to be left untouched for a given period. Otherwise, everyone would be transferring funds back and forth across banks to reap their benefits.
Overall, fresh funds are a good way of proving to the bank that you have the funds available for your mortgage payments and can be considered as pledged assets. Nonetheless, it would be wise to find out which accounts offer the best rewards with regards to mortgage benefits.
7. Interest Rate Cap
In the case of a floating rate, the interest rate varies and fluctuates according to market. Interest rate cap allows borrowers to limit their downside. In economic exuberance, interest rates may rise rapidly. This exposes you, the borrower, to a significant unexpected increase in monthly home loan and interest payments.
An interest rate cap works as an absolute ceiling interest rate increments. This means that the client knows exactly how much they have to pay on a maximum basis. This is an inherent risk of floating rates – while the lows can be beneficial, the highs can be equally detrimental. We recommend that you are well aware of any caps on your floating rate mortgage to stay well prepared in any economic condition!
8. Cash Rebates
For some packages, cash rebates are offered on completion of your mortgage. While this is less common for private residential property, these are not uncommon for commercial and industrial properties. This helps individuals / entities which take large mortgages to defray some costs. In most cases for residential properties, this applies to refinancing situations where cash rebates are proportional to the size of the home loan.
These rebates help to cover most of the costs involved with refinancing and increases bank adoption rate. Most borrowers tend to refinance because banks tend to offer better rates for new acquisition and pays off most of the refinancing cost. Do speak with a mortgage advisor to see if refinancing makes sense for you!
9. Rate Review Date
Imagine buying an apple from the market. The price of the apple fluctuates every day.
But you can only buy the apply on 1 specific date in the month.
Are you feeling lucky?
Rate review dates are applicable for floating rate loans which depend on a benchmark rate. Common review periods are 1 and 3 months.
In a low interest rate environment, 3-month review periods may be beneficial to prolong payments at that given low interest rate. As the begins to recover and interest rates begin to rise, wouldn’t you want to maximise the time paying lower interest rates? Conversely, in a falling interest rate environment, you would want frequent downward revisions to your interest rate and would hence opt for floating rates with a 1-month review period.
Do speak to your mortgage advisor, who will be able to share their experience with planning your loans around these review dates.
Mortgage insurance aims to protect you and your family in a situation where you are unable to make your monthly repayments. Any claims from the insurer would go toward satisfying your repayment obligations.
HDB owners already have this in the form of the Home Protection Scheme, but private property owners will have to seek their own form of mortgage insurance. Usually, the bank does offer such an insurance. In an increasingly uncertain economic environment, we encourage borrowers to take up such an insurance. The consequences of defaulting on your monthly payments may be dire and may result in repossession of the property. Ultimately, this safeguards against your family members having to make payments on your behalf in the unfortunate case that you are unable to do so.
We hope you have enjoyed this article explaining the different mortgage features! There are more in-depth strategies, terms and conditions for every mortgage feature. We are always committed to providing you with our knowledge and expertise to empower you to make the most well-informed financial decisions in pursuit of your dream property!
Do chat with our professional Redbrick Mortgage Advisors to take that next step!