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.

  • US renews travel warning to Mindanao
    US renews travel warning to Mindanao

    The US State Department renewed its warning about the risks of travel to the Philippines, in particular to the Sulu archipelago, certain regions and cities of Mindanao and the southern Sulu Sea area. In an update on Wednesday of a travel warning it issued Nov. 20, 2014, the State Department said US citizens should continue to defer non-essential travel to the Sulu archipelago due to the high threat of kidnapping of international travelers and violence linked to insurgency and terrorism there. …

  • Phl gains support for APEC Action Agenda
    Phl gains support for APEC Action Agenda

    The Philippine initiative to put the interests of micro, small and medium enterprises (MSMEs) front and center in global and regional trade has made significant progress following the conclusion on Thursday of the 2nd APEC Senior Officials’ Meeting (SOM2) and Related Meetings in Boracay, Aklan. Called “The Boracay Action Agenda to Globalize MSMEs,” the Philippine proposal calls for a host of specific, concrete and practical interventions that APEC economies can implement to provide MSMEs wider …

  • Phl to join Bangkok meet on Rohingya crisis next week
    Phl to join Bangkok meet on Rohingya crisis next week

    The Philippines will join a 15-nation meeting in Bangkok, Thailand next week to address the migration crisis involving thousands of Rohingyas who escaped persecution in Myanmar and Bangladesh. Justice Secretary Leila de Lima bared this yesterday after meeting with United Nations High Commission for Refugees (UNHCR) representative to the Philippines Bernard Kerblat. In an interview, De Lima said the Philippine government has been invited to the meeting. …

  • Magnitude 4.2 quake jolts Sorsogon
    Magnitude 4.2 quake jolts Sorsogon

    LEGAZPI CITY—A magnitude 4.2 earthquake hit Prieto Diaz town in Sorsogon before dawn yesterday, the Philippine Institute of Volcanology and Seismology (Phivolcs) said. …

  • Drought-resistant rice breeds bared
    Drought-resistant rice breeds bared

    SCIENCE CITY OF MUÑOZ, Nueva Ecija – Amid the searing heat, the Philippine Rice Research Institute central experiment station here has identified nine rice breeds which have been proven to be drought-resistant and produce high yields in temperatures as high as 38°C based on a recent study. Thelma Padolina, lead researcher of the study titled “Screening of rice-induced mutants for heat and drought tolerance,” identified the breeding lines as the Ballatinaw lines, PSB Rc72H and Azucena lines. …

  • Phl, US assert rights, ignore China warning
    Phl, US assert rights, ignore China warning

    The United States military will continue air and sea patrols in international waters even after the Chinese navy repeatedly warned a US surveillance plane to leave the airspace over artificial islands China is creating in the disputed South China Sea. The Philippine government also declared it would continue activities in the region, calling on China to respect freedom of navigation and aviation. “Our position on the importance of letting freedom of navigation, freedom of aviation and …

  • MM shutdown eyed for quake drill; 6 schools warned
    MM shutdown eyed for quake drill; 6 schools warned

    Electricity and mobile phone services would be cut throughout Metro Manila, and all private and government offices and businesses, including shopping malls, would be closed. The Philippine Institute of Volcanology and Seismology (Phivolcs) has warned that an earthquake of that magnitude could occur and kill at least 33,500 people and injure at least 113,600 others following a movement in the West Valley Fault. The West Valley Fault has moved four times in the past 1,400 years at an interval …

  • Subaru XV now priced among sedans
    Subaru XV now priced among sedans

    Motor Image Philipinas (MIP), the authorized distributor of Subaru in the country, has positioned its brand new crossover SUV, the Subaru XV, well within the sedan segment’s price range. This move, according to MIP, was made to give the public an opportunity to experience the brand’s unique automotive technologies by lowering its price. Buyers of […] The post Subaru XV now priced among sedans appeared first on Carmudi Philippines. …

POLL

Should Aquino be held accountable over the Mamasapano operations?

Loading...
Poll Choice Options