If you are like most Singaporeans, you probably took up a mortgage to help pay your current place of residence. Then again, as a typical Singaporean, you might need more than half of your working lifetime to pay it off as interest payments can amount to more than 50% of the price of your property (i.e. if you bought your property for $1million, the interest you pay over the tenor of your loan can be more than $500k!)
Here are some facts about your mortgage, which you may or may not already know that I hope, will help reduce your instalment payments, or the interest incurred:
- Financial institutions are not charitable organizations. At the end of the day, they have to turn a profit, and while there are many ways and avenues to achieve this, one thing is for sure, they will definitely not increase their profits by charging you lower interest rates over time. In fact, it has been known that interest income is one of the banks’ largest sources of revenue. The Net Interest Income (the difference between what a bank makes on loans and pays on deposits) from our largest local lender alone, climbed to a record S$1.6 billion this year!
- Mortgages in Singapore don’t last a lifetime. Mortgage customers are usually attracted by the banks’ promotional, highly competitive interest rates which usually are fixed for the first few years; however, subsequent years may see the bank raising the rates. Hence, one key element of any mortgage agreement to take note of is the minimum commitment period (a.k.a lock-in period or penalty period), and consistently change or transfer your existing loan package to a newer, promotional home loan to take advantage of the low rates, throughout your loan tenure.
- Interest rates will not stay low forever. The 3-month Singapore Interbank Offer Rate (3M SIBOR) was 7.75% in January 1998. And in August 2014, the 3M SIBOR hovered at around 0.4%. This explains why even though you may find your mortgage affordable now; it might not be the case going forward.Every increase of 1% in your mortgage interest will add approximately $10,000* to your instalments over a year. That will probably pay for a nice family holiday package complete with 5-star accommodation to an exotic travel destination every year! Though the current low of 0.4% for 3M SIBOR is one of the lowest we have seen, it may not take long for it to hit the average rate of 2% over the past twenty years.
- You can buy insurance to protect yourself from interest rate hikes. Well, not exactly the life insurance that you may know of. But you can hedge against rising interest rates by fixing your mortgage interest rates for the next few years. Fixed rates cost as little as 0.1% more than floating rates now, so it makes sense to lock your home loan to a fixed rate if you don’t intend to pay off your mortgage anytime soon.
- There are people who know all the best mortgage deals in the market. That’s us! Redbrick consolidates all home loan packages from 16 banks in Singapore and helps home owners source for the cheapest home loan packages, which are best suited to their needs.