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What your mortgage bankers 'forgot' to tell you about home loans

Things to be aware of include freebies that might have to be returned and interest rates that won't stay low for very long.

Most of the time, our eyes are glazed over when the mortgage banker is talking. There are so many financial terms and so much blather that we just give up and ask, “Look, how much per month?" and willingly get slaughtered. Here’s what they’re not telling you, though.

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1. The “low interest rates” are usually just low for the first three years.

Most home loan rates follow a pattern that looks like this:

Year 1: 3 Month Sibor (Singapore Interbank Offered Rate) + 0.8 per cent 
Year 2: 3 Month Sibor + 0.8 per cent
Year 3: 3 Month Sibor + 0.8 per cent
Year 4 and thereafter: 3 Month Sibor + 1.2 per cent

The keyword is “thereafter”. That’s the real rate you’ll be paying, all the way to the end of your home loan. As that’s usually about 30 years, it’s best not to pay attention to just the first three. It’s more important to secure a low “fourth year and thereafter” rate than it is to get the first three years for cheap.

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2. Refinancing isn’t always an option.

Wow, that’s like the captain of a cruise ship saying, “You can always start swimming if we sink."

The idea here is that when interest rates climb (in the fourth year), you can just switch to a new loan with three cheap years again. Easy, right?

Except that in an environment where interest rates are climbing, there’s no guarantee that you can find a cheaper option in four years. On top of that, refinancing is not a free thing you do with one phone call. It can cost upward of S$2,500 in administrative fees, and you need to go through the entire process of loan application again.

Here’s the kicker: It’s possible to pass (get your loan approved) the first time around, but fail on the refinancing attempt. That can happen if your income changes, if new loan policies are passed or if the bank just doesn’t like your age.

3. Using the bank’s law firms is the fastest way, and sometimes the worst idea.

A conveyancing firm needs to look over your home loan. And because they apparently need S$100,000 and several years of law school to do this, the fee is between S$2,500 to S$3,000.

But the thing is, you can use a different law firm if you find one that charges less. It just has to be on the bank’s board. So, you might be wondering, "Why doesn’t the mortgage banker just use the cheapest law firm?" Well, sometimes they do. But other times, there’s a nefarious reason: They might pick a law firm that’s only on their bank’s board – recognised by their bank but by no others.

If this happens, you have an additional impediment to refinancing. If you want to switch to a different bank, you could end up having to pay conveyancing fees all over again, as another law firm has to take over.

So, consider getting a mortgage broker to pick the law firm instead.

4. There’s no reason for you to pay this much.

What's the upside to taking a loan that’s more expensive – premium loan, if you like?

Well, there is none. Zero. Nada. Zilch. You just pay for for no reason whatsoever. To give you a simplified explanation, each bank has a certain quota of loans it wants to give out. As they come closer to meeting that quota, the interest rates go up. So, at any point in time, despite there being hundreds of home loan packages, only a handful are the best ones. That’s it; there’s nothing else to it.

But of course, the mortgage banker can’t tell you that – they get paid to sell loans, so they can’t very well tell you, “My loan package is just more expensive because we already gave out a lot of these”.  Which, again, is another reason to use a mortgage broker or a home loans comparison site. Don’t just go to the first bank you come across, and agree to anything.

5. You might have to return those freebies.

Sometimes, the mortgage banker might sweeten the deal for you. They might absorb the cost of the law firm, for example, or some other administrative fees.

But what they may not have told you is that there’s a clawback clause. This means that if you refinance within a certain number of years (whether or not there’s a lock-in), you may have to pay back these subsidised costs. If you think that’s stingy, you don’t know the half of it – some banks would probably ask for their complimentary pens back if they could.

So, before you agree to anything, ask whether are any clawback clauses, or extra terms regarding the perks.

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