Assessing Your Options | Managing Your Mortgage Effectively
The biggest concern for home buyers is usually the home loan. (If you’re not taking a loan, you should. Find out why in our next post!) When looking into taking a home loan, the most important factor is the interest rate, however, there are also other factors to consider.
All banks in Singapore will adjust their interest rates according to the Singapore Interbank offered Rate (SIBOR) or Swap Offered Rate (SOR) so rates are very often similar. The choices will thus depend more on other factors like the amount of money you borrow, the length of your loan term, and what you can do further down the road if you need more cash on hand or want to pay back the loan earlier.
1. Putting a Larger Down Payment
Although the maximum LTV you can borrow from a bank is 75% of the lower of either the total price or Annual Value (AV), it may not be necessary to borrow the maximum amount. If you have enough cash on hand to put down a larger down payment, you could reduce the monthly payments as well as the total interest you’ll have to pay.
By putting more initial cash upfront, you could greatly reduce the burden of monthly payments that you’ll need to pay for the length of your loan term.
2. Getting a Longer Loan Term
Most are already aware, but taking a longer loan term is a good way to keep monthly payments low. While the overall interest paid may be higher across the loan period, it is a good way to prevent overstraining your monthly budget.
In the future when your income has grown and you feel secure enough to pay off the loan earlier, it is much easier to refinance or reprice it with full or partial repayment and get a shorter-term and/or better rate.
3. Repricing
Most people will have heard of refinancing, but few know that there’s actually an alternative – repricing! This is similar to refinancing, except done with the same bank that you currently have a loan with. As it is the same bank, there is no need for too many rechecks and legal processes, which is why you do not need to pay legal fees.
Typically, there’s an $800 standard processing fee. In practice, depending on whether you are repricing while still under lock-in or not, or whether the bank will impose a penalty fee on top of the processing fee.
Repricing mortgages are typical to a lower interest rate or different loan package that better suits the borrower’s needs.
4. Refinancing
There are 3 types of refinancing:
- Rate-and-term refinance
- Cash-out refinance
- Cash-in refinance
The most common rate-and-term refinance refers to when you approach a different financial institute (FI) to buy out your existing loan. Through this, you can either adjust your loan term or interest rate or even both at once.
A cash-out refinance is often called a ‘reverse mortgage’ or ‘second mortgage’ as this involves increasing the borrowed amount based on the mortgage to get more cash on hand. This is a good alternative to getting a second loan as it comes with much lower interest rates than personal loans and instead of ensuring you can repay 2 separate loans, you simply need to adjust your current monthly payments.
As the amount you can borrow is based on your current home’s Annual Value (AV), this allows you to potentially ‘unlock’ any appreciated value from when you first bought it. In essence, it’s freeing up liquidity (cash) from a fixed asset (your property).
A cash-in refinance is basically an early partial repayment and refinance with a smaller balance. This may result in a lower mortgage rate, shorter loan term, or both. Another good reason to do a cash-in is to lower mortgage insurance premium payments (MIP).
5. Managing Your Budget
If you’ve been shopping around for loans, you’ll probably be familiar with the terms Total debt servicing ratio (TDSR) and Mortgage servicing ratio (MSR). These are general guidelines to ensure that you have some remaining liquidity to maintain your lifestyle.
The TDSR is capped at 60% while the MSR is 30%. This means that although 60% of your gross income may be tied up in debt repayments, only 30% can be to your mortgage loan.
If we assume that the mortgage is the only loan that you will be taking on and you are repaying the maximum MSR of 30%, that leaves you with 70% for necessities, discretionary purchases, and savings.
Going by the popular 50/30/20 rule, if we want to continue maintaining your normal standard of living, that leaves only 20% for savings and discretionary purchases. Otherwise, you’ll be forced to reduce your daily lifestyle.
If you reduce your MSR to 20%, it would free up a lot more cash for you to use. This is especially important for parents! Not just for our children’s education, but for things like toys and games and when they fall ill or are in need of vaccinations. An additional 10% might not seem much but could make a world of difference when emergency cash is needed.
Therefore, the general rule of thumb is to make sure that you can comfortably pay your monthly debts.