With big-ticket items like properties, the mortgage adds up to a sizeable amount. A 0.1% contrast in interest can result in a significant difference in your monthly repayments. However, is it enough to choose the seemingly lowest interest rate available? Unfortunately, it is not as straightforward as that. Read on to find out possible pitfalls you would want to avoid at all cost.
1. Choosing floating rates over fixed rates due to a lower first-year interest rate
Floating rates are subject to changes, and the initial lower rates might not be as attractive upon comparing the average interest rate of a fixed rate package. For example, for a floating rate package of 1.4% in the first year, 1.6% for the second year and 1.8% for the third year means an average interest rate of 1.57%, assuming a lock-in period of three years. A three-year fixed rate package of 1.5%, might seem higher than the initial 1.4% in the first year of the floating rate package, but it is more cost-effective overall. Mortgagors should evaluate the package as a whole instead of simply choosing the package with the lowest first-year interest rates.
2. Viewing fixed deposit rates as fixed rates
With the myriad of mortgage packages available in the market, mortgagors might not be able to clearly differentiate among packages. Nowadays, there is fixed deposit (FD) pegged rates, fixed deposit home rates (FHR), SIBOR pegged and even bank board rates being made available. Some mortgagors might think FD-pegged and FHR-pegged rates are fixed rate packages, but in reality, they are floating rate packages. By rule of thumb, fixed rates are a standalone figure while floating rates usually consists of a formula.
3. Giving late notice
It is especially common for mortgagors to leave it too late when refinancing their mortgage. They usually decide to refinance only when they receive the bank’s notice of interest rates rising – usually one month in advance. However, a minimum three-month written notice is needed for any refinancing move. Hence, mortgagors should set a reminder about four months before their lock-in period expires, and this is to allow ample time to send a written notice before the expiry of the lock-in period..
4. Ignoring or forgetting the claw-back period when refinancing
This applies to refinance cases where subsidies or cash rebates are offered. If the loan is fully repaid or refinanced to another bank or if the property is sold within the first three years, the bank will request for the full refund of subsidies or cash rebate previously given to the mortgagor. A lot of mortgagors overlooked the claw-back period and did not include it in the calculation of their refinancing move. They are then shocked when the banks claim back the subsidies or cash rebates upon refinancing or selling the property. Therefore, mortgagors should keep the loan agreement for future reference.
Since mortgage packages are always changing, mortgage seekers might find it challenging to stay updated on the latest rates and offerings available. Also, factors like cash rebates, legal subsidies, lock-in periods, claw-back periods and average interest rates should all be considered before selecting a mortgage package.
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