If you’re shopping around for your first home, one thing that you’ll definitely want to get right is your home loan. You’ll be servicing this loan for decades to come; bearing this in mind, it’s important to choose a loan that’s a good fit for you. We walk you through the different terms in a mortgage agreement, and decipher the jargon for you.
FHR refers to Fixed Deposit Home Rate. This is a form of Internal Board Rate (IBR), in which home loan interest rates are pegged to the bank’s Fixed Deposit rates. It is one of the more popular floating interest rate home loans in Singapore.
Unlike rates pegged to the Singapore Interbank Offered Rate (SIBOR), FHR rates are controlled by the bank – not by prevailing interest rates. This means that while the bank can raise the rates at will, they are disinclined to do so as it means they need to pay out for their fixed deposits.
2. LOCK-IN PERIOD
Banks tend to offer borrowers special promotional rates for the first few years of their loan, and in order to cover their bases, they “lock in” borrowers. This means borrowers cannot refinance (switch to another bank) during the lock-in period without a penalty.
In most cases, the penalty is 1.5 per cent of the outstanding loan. For example, if you have S$400,000 outstanding on the loan, the penalty will be roughly $6,000.
Lock-in rates are almost never worth paying, as they more than make up for any savings from a cheaper package. However, note that some borrowers specifically seek out lock-in packages.
This is because loan packages with lock-in rates can be cheaper than those without. So if you’re not planning to refinance during the lock-in period, it’s actually advantageous to you.
3. PARTIAL PREPAYMENT PENALTY
Closely linked to the idea of the lock-in period is the partial prepayment penalty. This works pretty similarly to the lock-in: Assuming you want to pay off part of your loan ahead of your time, you’ll incur a penalty of around 1.5 per cent of the amount you’re pre-paying.
Note that for HDB Concessionary Loans, there are no prepayment penalties.
4. RE-PRICING ADMIN FEE
If you’re not sure what re-pricing is, it’s essentially when you talk to your bank and request to switch over to another loan package, following the expiry of your lock-in period.
Most banks will be happy to allow you to switch to a different loan package, with the caveat that you pay an admin fee. This admin fee generally runs from S$200 to S$800, so if you want to have the flexibility of adopting a new loan package, definitely take this into consideration.
Some loan packages come with one to two free re-pricing options.
5. BREAKAGE FEE
Most bank loans in Singapore are pegged to the three-month Singapore Interbank Offered Rate, which means that interest rates charged to borrowers change every three months.
As such, borrowers who want to repay their loan partially or in full will have to do this on the three-month mark, when the existing interest rate expires. If borrowers redeem their loan outside this three-month expiry date, they’ll be liable to pay a breakage fee that generally hovers around five per cent of the loan amount redeemed.
6. CANCELLATION FEE
The cancellation fee comes into play when a borrower cancels the loan before it is even disbursed. Seeing as it’s rare for borrowers to change their mind about a home loan immediately after signing on the dotted line, we hardly see cases of borrowers being slapped with cancellation fees. This is typically 0.5 per cent to two per cent of the loan amount.
7. LEGAL FEE SUBSIDY CLAWBACK
Last but not least, there’s the legal fee subsidy clawback. If a borrower chooses to move their loan within three years of refinancing it, they’ll incur this clawback. More specifically, the borrower will have to refund the legal fee subsidy (capped at S$2,000 or thereabouts) that the bank previously forked out.
This article first appeared in 99.co.