Long Term Planning for Singapore Home Loans

My long term plan for my home loan is to get it paid, and not have to live off baked beans under a cardboard box. Is that a lot to ask for? Apparently yes. No one’s allowed this privilege, not without facing the Chamber of 10,000 Maths Illusions. Better believe it; banks hire product teams whose sole objective is to make stuff look cheaper than it really is. Including your home loan. In this article, I look at ways to bypass their tactics and plan long term:

 

Scenic, tropical condo

S’poreans: Live on a real tropical island; pay for a fake tropical beach.

 

Long Term Planning for Home Loans

When it comes to home loans, most of us only worry about monthly repayments. It makes us feel better. If we actually need to process the fact that we borrowed $350,000 to a over a million, we might puke.

But this myopia costs home owners a lot of money in the long run. If you’re just a property investor, short term planning is no problem; you’ll be selling the house, so you won’t be dealing with the full loan tenure. But if you’re a home owner, you need a different perspective.

You need to:

  • Consider The “Thereafter” Costs of the Loan
  • Avoid Assumptions About Refinancing

 

Consider the “Thereafter Cost” of the Loan

 

Empited piggy bank

That’s the method I was taught in Primary school and that’s the method I’ll use, dammit.

 

When getting a home loan, banks try to distract you with “teaser” rates. These are extremely low interest rates, which are usually offered for the first three to five years.

As a long term home owner, you need to look beyond these. You need to calculate the “thereafter” costs; the total interest paid over your entire loan tenure.

Here’s an example:

Let’s say I need a $1,000,000 loan, with a 30 year loan tenure. I have two options, Bank X and Bank Y.

When the banks calculate my interest rate, it consists of two parts: A fixed spread, plus the Interbank rate (usually SIBOR or SOR). For the purposes of this example, we will assume a 3 Months SIBOR rate of 0.35%.

The fixed spread for Bank X is 0.75% for three years, and 0.90% from the fourth year onwards.

The fixed spread for Bank Y is 0.65% for three years, and 1.25% from the fourth year onwards.

 

 

Bank X

Bank Y

Year 1

3 Months SIBOR + 0.75%

3 Months SIBOR + 0.65%

Year 2

3 Months SIBOR + 0.75%

3 Months SIBOR + 0.65%

Year 3

3 Months SIBOR + 0.75%

3 Months SIBOR + 0.65%

Year 4 and Thereafter

3 Months SIBOR + 0.90%

3 Months SIBOR + 1.25%

 *Assume 3 Month SIBOR = 0.35%

Notice how Bank Y looks sexier in the first three years, whereas Bank X has all the appeal of Drew Carey in Spandex.

But when we crunch the numbers, here’s what they add up to:

Bank X (Total Interest Paid Over 30 Years)  = Approx. $195,031.62

Bank Y (Total Interest Paid Over 30 Years) = Approx. $240,868.80

Bank X would have saved me over $45,800.

And before you ask, no, most bankers won’t set up nice comparison tables for you. It’s not in their (drum roll for bad pun) interest. You need to visit loan comparison sites like SmartLoans.sg, and look up the tables.

 

Clock

“Time is money. No, I mean for me; I’m a banker. Everyone else actually has to work.”

 

Avoid Assumptions About Refinancing

Some bankers will hand-wave the “thereafter” costs. They’ll tell you it’s no big deal, because you can always refinance when the rate goes up.

Well, you can plan to refinance to a cheaper loan; but that’s gambling. The home loans market isn’t static. Anything from bus routes to Angela Merkel having a bad day can turn it upside down. You can’t assume the rates you see now will be there in four years.

Let’s go back to my earlier example. Let’s say someone from Bank Y tells me:

“Who cares if we’re more expensive? Take our loan for three years, then refinance.”

 

Old men sitting on the stairs

“Okay, I admit I exaggerated about the rates dropping. Can we not wait another 25 years?”

 

So I take their advice. On the fourth year, I check banks to switch my loan to.

Then I freak: Because interest rates have spiked in that time, and now I can’t find a fixed spread below 1%. If I had gone with Bank X, I would have a fixed spread of 0.90% for the rest of my loan tenure. Now the same opportunity just doesn’t exist.

And consider this: Interest rates are at a historical 10 year low. Due to the poor global economy, governments and banks have been trying to stimulate buying and lending. That happily involves keeping home loan rates low. But industry experts have stressed that, as the global economy improves, it’s highly probable that the banks’ interest rates will increase.

If you’re interested in more long term planning for home loans, follow us on Facebook. We’ll keep you up to date on the local property scene. But for now, crunch some numbers and make sure you’re not over-paying interest.

What are your long-term plans for your home loan? Comment and let us know!

Image Credits:
ashkyd, edenpictures, earls37a, watchsmart

Get more Personal Finance tips and tricks on www.MoneySmart.sg

Click to Compare Singapore Home Loans, Car Insurance and Credit Cards on our other sites.



More From MoneySmart
Loading...

Editor’s note:Yahoo Philippines encourages responsible comments that add dimension to the discussion. No bashing or hate speech, please. You can express your opinion without slamming others or making derogatory remarks.

  • Halt Indonesia drug executions until graft claims probed: Australia
    Halt Indonesia drug executions until graft claims probed: Australia

    Australia on Monday urged Indonesia to ensure all legal processes have been cleared of corruption before executing two of its nationals as bribery allegations surfaced regarding their drug smuggling trial. Foreign Minister Julie Bishop spoke to her Indonesian counterpart Retno Marsudi on Sunday evening while Prime Minister Tony Abbott has written to President Joko Widodo to again plead for the executions to be halted. "Bali Nine" drug traffickers Myuran Sukumaran and Andrew Chan could face …

  • Pagasa: Drought may worsen
    Pagasa: Drought may worsen

    The drought in 12 already dry areas in the country is expected to worsen as the summer season peaks next month, the Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) warned yesterday. In an advisory, PAGASA said the provinces of Albay, Bataan, Batangas, Biliran, Cavite, Cebu, Ilocos Norte, Leyte, Misamis Occidental, Pampanga, Zamboanga del Norte and Zamboanga del Sur will continue to receive “way below” or “below normal” rainfall in May. PAGASA defines …

  • Maximum restraint for Phl troops in West Phl Sea
    Maximum restraint for Phl troops in West Phl Sea

    The military has advised its pilots conducting surveillance in the West Philippine Sea to exercise maximum restraint even if they are being bullied by Chinese troops. Armed Forces spokesman Brig. Gen. Joselito Kakilala said all actions of the pilots should be consistent with the declaration of conduct signed by claimant countries. Armed Forces public affairs chief Lt. Col. Harold Cabunoc said the Philippines should remain on moral high ground when it comes to the territorial dispute. A …

  • MMDA simulates rescue march after quake, tsunami
    MMDA simulates rescue march after quake, tsunami

    The Metro Manila Development Authority (MMDA) yesterday led the annual rescue march from Quezon City to Manila, giving rescue volunteers a glimpse of possible scenarios if the metropolis is hit by a strong quake or is inundated by a tsunami. Cora Jimenez, MMDA general manager, said 700 volunteer rescuers walked from the Quezon City memorial circle to the Bonifacio monument in front of the Manila city hall to simulate a response-exercise to a magnitude 7.2 earthquake. Renato Solidum, …

  • Islamic State threatens Mindanao, Phl tells Asean
    Islamic State threatens Mindanao, Phl tells Asean

    Foreign Affairs Secretary Albert del Rosario bared yesterday before the Association of Southeast Asian Nations (ASEAN) reports of the Islamic State of Iraq and Syria (ISIS) threat to the Philippines through the Black Flag Movement in Mindanao. Speaking before ASEAN foreign ministers, Del Rosario said the ISIS threat to Philippine security is real rather than imagined because of the Black Flag Movement’s pledge of allegiance to ISIS leader Abu Bakr al-Baghdadi. …

  • ‘Chinese reclamation affecting Phl’s energy security bid’
    ‘Chinese reclamation affecting Phl’s energy security bid’

    China’s occupation and buildup of its military structures in the West Philippine Sea and South China Sea is causing the country’s top energy official to get the jitters as the encroachment is seen as a huge dent on the Philippines’ efforts to achieve energy security. “It is a concern but if we don’t bring it to the United Nations, where will we bring it? We cannot bang heads with them,” Energy Secretary Carlos Jericho Petilla told The STAR in an interview over the weekend. The US Energy …

  • Phl to Asean: China getting de facto control
    Phl to Asean: China getting de facto control

    The Philippines yesterday urged the Association of Southeast Asian Nations (ASEAN) to unite and stop China’s massive reclamation in disputed waters as it will give China “de facto control” over the area and cause $100 million in marine wealth losses annually. At the ASEAN Foreign Ministers’ Meeting here, Foreign Affairs Secretary Albert del Rosario told his counterparts that the situation in West Philippine Sea had worsened just a year after the Philippines began to draw international …

  • Gov’t spends P11.8 M for Noy’s Asean trip
    Gov’t spends P11.8 M for Noy’s Asean trip

    The government has allotted about P11.8 million for President Aquino’s attendance at the 26th Association of Southeast Asian Nations (ASEAN) summit in Kuala Lumpur and Langkawi in Malaysia from April 26 to 28. “President Aquino’s participation to the 26th ASEAN Summit is important as the region gears toward the creation of an ASEAN community, which is envisioned to provide new opportunities for the peoples of this region, including the Philippines,” Ochoa said in a statement. He was with …

POLL

Should Aquino be held accountable over the Mamasapano operations?

Loading...
Poll Choice Options