What to know before buying a new property, or refinancing your home loan

Mr Lim Beng Hua, UOB’s head of secured loans, answers your key questions about rising mortgage rates in Singapore

Home loan rates in Singapore have been on an upward trend
Carefully assess how much you can afford to pay in upfront fees and monthly mortgage when planning a property purchase. PHOTO: GETTY IMAGES

Home loan rates are rising, with three-year fixed rate packages offered by Singapore banks up by at least 1.6 percentage points from late last year's 1.15 per cent per annum. As interest rates are likely to continue on their upward march, what can existing home owners and aspiring home buyers do?

In this column, Mr Lim Beng Hua, UOB’s head of secured loans, answers some of your key questions about rising mortgage rates. The 50-year-old expert has been in the financial sector for over 20 years. Secured loans are those that are backed by collaterals, and include mortgages.

Q: I am buying a new property this year. What are some considerations I should keep in mind when looking for a home loan?

A: For most of us, buying a home is the largest financial commitment we will make, so we need to research and plan for a property purchase accordingly.

Carefully assess how much you can afford to pay in upfront fees – including the cash outlay, stamp duties and legal fees – and your monthly mortgage. Our local interest rates are strongly influenced by global central bank policies. Since they have been rising, you should consider using a higher rate when calculating your potential monthly payments.

There are digital tools like UOB Home Solution that helps you instantly calculate the home loan amount you can afford and get a valuation on the property you are eyeing, so you do not overextend yourself.

Q: Should I choose a fixed-rate or floating-rate mortgage? Which one is better in the long run? 

A: This really depends on your needs. If you prefer greater certainty on your mortgage payments to manage your cash flow, a fixed-rate package would be more appropriate. Or you can consider a floating-rate package if you are less sensitive to interest rate fluctuations.

We also offer packages where a portion of the amount is based on a fixed rate, and the rest is pegged to a floating rate like the Singapore Overnight Rate Average (Sora). This gives you the flexibility to make prepayments should interest rates stay high, while the fixed-rate portion protects you against further rate increases.

Q: I have an outstanding home loan. Is now a good time for me to refinance my loan? What else should I consider besides interest rates?

A: Take a careful look at the terms of your current loan. Use a home loan calculator to analyse how much you would be paying – not just at today’s interest rates, but under different scenarios – for your loan, compared to others in the market.

Familiarise yourself with the lock-in period of your current loan and whether there would be any clawbacks on legal fee or valuation subsidies if you refinance.

It can take some time to refinance your loan, and you would be subject to a new lock-in period and terms for any subsidies, so it wouldn’t hurt to start a conversation with your bank early.

Q: I have more savings than I need at the moment. Is it better for me to invest this money or use it to partially pay off my home loan?

A: It is always prudent to have a healthy cash buffer relative to your loan obligations. If you have excess cash, such as if you have received a bonus, the decision on whether to invest or pay off your home loan depends on many factors.

Most importantly, remember not to lose sight of your fundamental goals, such as your retirement or your child’s education. This will determine your investment time horizon, risk appetite and expected returns.

Interestingly, the high-inflation environment tends to benefit certain investment asset classes, including real assets like property and real estate investment trusts (REITs), and commodities such as gold. Bond yields have also reached attractive levels today. It might make sense to budget more money for your investments, especially if you expect to get stronger returns than the interest rate on your loan.

If you receive a salary increment, you could consider reducing your loan tenure. This would increase your monthly mortgage payment but could reduce your overall interest costs.

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