STI: How to safeguard your home and investment

May 24, 2004

How to safeguard your home and investment

Keep your loan term short

AIM for the shortest possible repayment period, taking into account your ability to pay. The shorter the loan term, the better interest rates are likely to be. Choosing a shorter repayment period, therefore, could result in significant savings.

Ultimately though, you should tailor the repayment term to your housing plans. If you aim to be an owner-occupier, a longer mortgage period with fixed interest rates could still be an attractive option. However, if you plan to upgrade within a few years, or to sell the property in the near term, a shorter period would still be the way to go.

To gauge your 'ability to pay', financial advisers say your monthly repayments should not exceed 20 to 25 per cent of your income, inclusive of CPF.

Don't drain your CPF

IF YOU put the bulk of your CPF monthly contributions towards repaying your mortgage, you may find that you have little left over for retirement or to pay off that same loan when money is tight.

This problem is especially relevant as CPF contributions have fallen over the years.

Stay in the know

HOUSING regulations and legislation change. Be aware of the latest policies, to avoid nasty shocks.

Take, for example, the 'first charge' issue. Previously, the CPF Board had first claim on your property in the event that you defaulted on your home loan. Now, this first charge has shifted to the banks - unless they do not object to it remaining with the CPF Board.

If you cannot pay off your home loan - say, in the case of bankruptcy - and your property is sold, the bank has the first claim to the sale proceeds. The CPF Board is paid if there is money left over.

While this helps you get more competitive mortgage packages from banks, you could also lose all the CPF money you invested in that home if the bank forecloses on it.

With this in mind, you might consider requesting that the CPF Board retain first charge.

Fixed or floating rates?

WHETHER you choose a fixed or variable rate is a personal choice. For long-term mortgages, fixed rates tend to produce greater savings because rates usually go up in the long term.

If you think rates will fall, or if you don't plan to hold on to your property for long, variable or 'floating' rates could be better, as they tend to be easier on the pocket than fixed ones. Also, consider how vulnerable you are to interest rate fluctuations. If your cash flow is tight, you might not want to risk a rate hike under a floating system.

Theoretically, starting out with a low floating rate and then switching to a fixed-rate scheme if a hike takes place would maximise your savings, but this scenario, which looks pleasing on paper, doesn't take into account refinancing penalties, which could offset whatever interest rate gains you hope to receive.

Watch those extra charges

APART from the cost of the property itself, buying a home brings with it other charges. Make sure you've taken all of them into account.

First, check if your bank charges any processing or valuation fees. Most banks bear these costs for their customers.

Second, note the late charges. If you are tardy with your monthly instalments, the bank might slap on an additional fee, so find out how long the grace period is and how much you will be penalised.

Third, mortgages usually require that you take out a fire insurance policy on your property. Banks generally provide this for free.

Fourth, ask if the loan package includes subsidised legal fees.

Finally, remember, stamp duty is payable when you buy a house. It is 1 per cent for the first $180,000; 2 per cent for the second $180,000; and 3 per cent for the remainder.