ST : Consider these

May 2, 2010

Consider these

1 Loan tenor

A longer loan repayment period generally means smaller monthly repayments, while a shorter tenor may lead to lower interest paid, although repayments will be higher.

It is worth considering the optimal loan tenor as it affects monthly repayments and interest paid.

Instead of going to either extreme, consider matching the loan tenor to your intended retirement age.

If you are 42, for example, you can take up a 20-year loan that will be paid off by the time you retire at 62.

Financial Alliance associate director Tea Eng Peng says that if you choose a longer loan tenor, you should take up mortgage insurance with a critical illness cover. This will hedge the risk that you are unable to make your monthly repayments due to premature death or disability.

2 Affordability

Before taking the loan, calculate your debt service ratio. It is the percentage of your monthly income needed to service long-term liabilities.

A healthy debt servicing ratio - debt divided by income - should be 35 per cent or less.

'A good rule to follow is to buy what you need and can afford, not what you want and desire and then have to burn the candle at both ends to cough up the monthly mortgage repayment,' said Mr Apelles Poh, a financial planner with Professional Investment Advisory Services.

3 Fixed or variable packages

Fixed packages are suitable for consumers who want to know how much their instalments are for a set period.

With fixed packages, the monthly instalments are not open to fluctuations.

'Fixing the rates for the next few years, the advantage is that you can have peace of mind and you can predict or budget easily,' says Mr Dennis Ng, spokesman for www.HousingLoanSG.com - a mortgage consultancy portal.

'The disadvantage is that banks typically charge higher interest rates for fixed-rate packages, and you might end up paying higher interest if interest rates remain stable or low.'

Mr Ng says variable packages typically come with shorter lock-in periods.

For variable packages, the loan is usually linked to one of two major benchmark rates: Singapore Interbank Offered Rate (Sibor) or the Swap Offer Rate (SOR).

Experts say that as soon as the United States starts to raise interest rates, which could be as early as the end of this year, local interest rates will follow suit.

4 Early payment options

Not all loans allow customers to settle early,

so check the fine print before signing up. An early settlement fee is usually imposed if a loan is paid off early.

'A cancellation of the loan with the lock-in period often entails a penalty of, say 1 per cent of outstanding loan, and a claw-back of legal subsidy, valuation fees and fire insurance premiums,' Mr Poh says.