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Important factors to consider before you finally sign up for a home loan

Important factors to consider before you finally sign up for a home loan
By Ajita Jha

Introduction 

In the simplest words, a home loan is money that you acquire to buy a home. Whenever you come across a home that you set your heart on but do not have enough cash in your bank account, in that situation you take help from a financial provider or a bank that loans you the money to pay for the home. Remember, at the end of the day it is a borrowed money and not a gift. You will be liable to repay the amount even more than the original amount of home loan which in banking terms is usually known as ‘principal amount’. On top of that, you will also have to pay the interest along with bank fees.

To avoid getting trapped into a financial agreement that becomes a cause of your sadness, do take note of the following factors of the home loan before moving further:

 

Amount of the loan 

If you are a first time home buyer, you will usually get a loan amount up to 75% of the actual value of the property. However, banks will decide the final amount on the basis of your ability to repay the loan. Your ability of repayment will be determined by debt servicing ratios such as Mortgage Servicing Ratio and Total Debt Servicing Ratio.

Presently, MSR is 30% of your gross monthly income. However, it only includes your housing loan repayments. You can use MSR and TDSR calculators to help plan your loan.

Currently, TDSR stands at 60% which implies that the total amount of your borrowings from others, be it a credit card bill, an education loan, or a renovation loan, it should not be more than 60% of your monthly income.  

 

Term of the loan 

It is a time period that is taken to completely repay the loan. The average duration for loan range from 10-35 years. The longer the term of your loan is, the lesser the monthly repayment you will have to make but eventually, it will account for a higher amount of interest.

Also do not ignore the age factor. Banks do take your age into account and keep the maximum term up to 65 years of age. For example, if you are 45 years old, you are most likely to get a loan term for up to 20 years.

 

Floating or Fixed rate

As the name suggests, fixed rates do not change over a period of time that keeps borrowers stable and secure. But it comes with a condition – you will be charged a higher rate of interest when compared to floating rate packages.

You can consult any bank agent to know the future interest rates and accordingly make your decision. If you are told that the interest will remain less or fall in times to come, then you can go for floating rate packages. In the case of floating rate home loan packages, they are usually linked to one of the two paramount standard rates: the Swap Offer Rate (SOR) and Singapore Interbank Offered Rate (SIBOR). Now, SIBOR is accepted as the main benchmark. These rates are primarily affected by the interest rates of the US and Singapore banking system liquidity.

As of now, 1-month SIBOR is lingering at 1.88%, far lesser than what it used to be 10 years ago. A decade ago the rates were as high as 3.6%.

Other noteworthy characteristics, discounts, and promotions 

There are some banks that render interest-only packages. If you want to slash the outflow of cash during the interest-only period then this option may be suitable for you. In these loans, you are only required to pay the interest amount for a particular period and after that, the loan will come back to a usual interest plus principal loan.

Then there some loans which have an interest offset feature, where you can offset the loan amount through using the bank deposits to only pay the loan interest on the difference.

 

Penalties, subsidies and lock-in periods 

Most of the home loan providers give some subsidies including valuation, legal, and fire insurance fees. While making comparisons among housing loans, you should examine what are the different fee subsidy amounts.

The choice of lock-in period usually depends upon the estimated time of selling the property and also on your view of where interest rates are going. The shorter the lock-in period would be, the higher the rate of interest would be charged. If you decide to repay the mortgage within the lock-in period, you will be charged with the penalty of anywhere between 0.75% to1.5%.

Before making your final commitment to the home loan, please study the fine print at least twice. Also do not skip reading about the cancellation fees before you sign.

 

Conclusion 

Signing up for a loan can be intimidating as well as an overwhelming process. Always seek advice from an experienced bank official or mortgage broker as well as go through various online sources to arrive at a prudent borrowing decision. Do not ever make a hasty financial decision without being fully informed.