Planning your next big property purchase? Need help on how you can make smarter choices on bank loan to finance your property? We’ve got your back with our latest bank loan guide containing terms and tips to make better mortgage choices.
1. Fixed vs Floating Interest Rate
Every bank loan offers two types of interest rates: Either a fixed interest rate or floating interest rate.
As the name suggests, a fixed interest rate means that the rate doesn’t change from the moment you sign the deal until the moment it expires. This is usually known as a lock-in period where your interest rate won't change between the start and end date stated in the bank loan contract.
On the flipside, a floating interest rate is one that is dynamic. It is typically defined by a formula with an interest rate benchmark and a spread.
Floating Interest Rate = Interest Rate Benchmark + Spread
Source: Mortgage Master
For example, the floating interest rate on this bank loan is determined by 3M SORA (interest rate benchmark) + 0.60% (spread) in the first year.
Let’s say you decide to take up this bank loan today, then the interest rate you will pay for the first year is 3.69%. However, the 3M SORA changes every three months. As such, throughout the first year, the interest rate that you are paying may not stay stagnant at 3.69%. This is why this interest rate is known as a floating one.
2. Floating Interest Rate: SORA vs Board Rate
For floating interest rates, there are two main types of benchmarks that you need to know: Singapore Overnight Rate Average (SORA) and the board rate. Singapore Overnight Rate (SOR) is the rate that banks have to pay each other for any unsecured overnight interbank SGD cash. 3M SORA is simply the volume-weighted average rate of such borrowing transactions in the last three months.
As an interest rate benchmark, SOR fluctuates on a day-to-day basis. However, you won’t see your floating interest rate change daily because that means a lot of work for banks and homeowners to grapple with. Thus, most banks use 3M SORA as the standard interest rate benchmark.
For the board rate, it is also a type of interest rate benchmark. However, the key difference between board rate and SORA is that board rate is determined internally by the bank. There’s no transparency on how the rate is determined or what the rate will be.
You may wonder, isn’t that just like SORA? And that’s just not true because SORA is calculated based on actual unsecured borrowings between banks. The numbers are reported to Monetary Authority of Singapore (MAS), not just plucked out of thin air. This isn’t the case for board rate because banks can choose to adjust the board rate with enough notice period to its customers.
Then what about interest rate benchmark like DBS Fixed Deposit Home Rates (FHR)? DBS FHR is also a type of board rate, albeit with some slight difference. That’s because DBS FHR is tied to the DBS Singapore Dollar Fixed Deposit (S$FD) board interest rates. However, the exact pegging is also unknown to us, making it more similar to a board rate than SORA.
3. Loan-To-Value: Should I Take More Or Less?
Loan-to-value (LTV) is the ratio that is used to determine how much of your property you’re going to finance with a bank loan and how much of the remainder is going to be paid in cash or CPF.
A higher LTV means that you’re taking on more financial leverage because you’re financing your property purchase with your credit (aka future earnings). Doing so means that you have to fork out less cash at present point in time to make the down payment for your property purchase.
This does have its flipside. Because a higher LTV means that you’re borrowing a larger loan quantum, it will result in a higher interest payment on your bank loan.
There’s no such thing as a right or wrong LTV ratio. Instead, you should consider how comfortable you are with taking on debt for the purpose of getting a roof over your head. If you need professional advice on what’s a suitable LTV for you, you can schedule a call with our mortgage consultants. They will provide you with sound advice on what you should do with your bank loan.
4. Principal Repayment vs Interest Repayment
When you make monthly repayment to the bank for your bank loan, the repayment is split into two segments. One segment is used to repay the interest that you owe to the bank while the other is used for drawing down from the principal that you owe to the bank.
At the end of every month, the bank takes the outstanding principal that you owe on your bank loan to calculate the interest owed for the month. For instance, if you have an outstanding bank loan of $100,000 at an interest rate of 3.6%, an interest of $300 is added to your outstanding bank loan.
When you make the monthly repayment (e.g. $450), $300 will be used to pay off the accrued interest first. This settlement is known as the interest repayment. The balance of $150 will be used to repay the principal. This is known as the principal repayment.
Some bank loans allow you to make lump sum repayment of the principal but it may come with certain conditions. For instance, you can only make lump sum repayment upon reset of the interest rate. If you are on a bank loan pegged to 3M SORA, then the reset is every three months when the new interest rate is calculated.
5. Loan Tenure: Longer vs Shorter
Because of interest on your bank loan, the actual amount you end up paying is not just the face value of your bank loan. This is due to the interest that accrues on the bank loan that you are taking out to finance your property.
Source: Mortgage Master Calculator
Imagine that you need to take out a bank loan for a $500,000 property with an interest rate of 3.69%.
If you decide on a loan tenure of 25 years, the overall cost of your property will be $766,306 instead of just $500,000. The extra $266,306 is what you would have paid as interest to the bank.
If you choose a shorter loan tenure (i.e. 20 years), you will save a whopping $58,582 on interest. However, the downside is that your monthly mortgage repayment will be higher ($2,948.85 vs $2,554.36).
You can experiment with the loan tenure using our Mortgage Master calculator, which is free to use!
Choosing the right length of loan tenure may be more of an art than science. Luckily for you, we have our mortgage consultants at Mortgage Master who can help you to master the art of choosing the right loan tenure for your bank loan.
6. How To Find The Best Bank Loan Deals In The Market?
The last and perhaps most important tip you need to know so that you can make a smarter mortgage choice is where do you go about sourcing for the best bank loan deals in the market?
Scouring through the internet and pulling all the data from individual bank websites is definitely one way. Or you can try the old trusted way of calling up every bank and finding the latest bank loan deals. But these can be quite time consuming and we know that your time can be better spent on other things.
That’s why we suggest engaging a mortgage consultant to do the legwork for you. At Mortgage Master, we know the latest home loan packages in the market. Not just that, but having a mortgage consultant also sometimes mean that you get exclusive interest rate packages that you cannot get directly from the bank. If you're looking to purchase a new property, or refinance your existing home loan, fill up our enquiry form and our mortgage consultants will follow up with a call.