The owner has just given you the Option to Purchase. Now you have 14 days to find housing loan from a bank to finance your purchase. Since you will be paying for COV (if any) and the 20% of the Valuation Price from your own pocket, the loan amount that you need to get is 80% of the Valuation Price. For us, the VP is $335,000, and the loan amount is $268,000.
Some components of the loan that you need to be beware of:
1. Fixed vs. floating rate: Fixed rate is generally higher than the floating rate, but the floating rate can vary widely as well. If you are a type of person who prefers low risk, fixed rate is for you. The current interest rate is historically low, by the way, as the US property market remains depressed. For comparison, HDB concessionary rate is fixed at 2.6% p.a. (i.e., 0.1% higher than your CPF OA interest, to make sure that your OA growth is less than your mortgage interest). Logically, the bank/market rate should be larger than that (if not, it would not be called as “concessionary” rate; not to mention that not everyone is eligible for HDB loan). But, because of this anomaly, the current market rate is lower than the HDB rate. So, you shouldn’t really complain if later on the market rate is higher than the HDB rate. That’s the way things supposed to be, although of course if the interest is already higher than 4-5%, you might want to refinance your loan with the bank.
2. Lock-in period: How long you must follow the current rate plan before you could switch to another plan. In general it is 2-3 years before you could refinance your loan. I still don’t really understand about refinancing, though, as I have never been into one.
3. Loan period: The banks have different standard. Standard Chartered would only finance your loan as long as the remaining lease of the unit is more than 30 years. So, for our case, since the remaining lease of the flat is only 57 years now, they would only give a loan for 27 years at maximum. DBS/POSB, on the other hand, is willing to finance your loan as long as the remaining lease of the unit is more than 20 years. So for us the maximum term is 37 years. The other limiting factor is your age. I think the cap is 65 years old. So if you are getting your loan when you are 40 years old, the maximum loan term will be 25 years.
Of course, the longer it takes to service the loan, the incurred interest becomes larger. You do want to finish up your loan as soon as possible. But, on the other hand, the monthly payment will be less as well. So it really depends on your cashflow and your plan about the unit itself. For us, we plan to sell the house anyway after 10 years, so what we do is to compare the incurred interest after 10 years for different lengths of loan period (20, 25, 30, and 35 years) and to choose the loan term accordingly. As in everything else, it is about trade-off.
4. Legal fee subsidy: The banks will also give different amount of legal subsidy. It could really help as you might be running out of cash when you purchase the house.
5. Home insurance: It is basically a life insurance which is tied to your mortgage. In case, knock wood, you or your spouse died before the end of the loan term, the insurance will pay you the amount of money which should be sufficient to pay off the outstanding housing loan. Although technically you can sign-up for this scheme from CPF, your bank will ask you to sign up to their insurance provider. For example, StanChart used Prudential while DBS/POSB used Aviva. Naturally, the older you are, the premium will be higher. The private insurance premium is more expensive than the scheme from CPF, but usually it comes with a more extensive coverage as well.
The first bank that we visited was Standard Chartered, because we heard that their rate was pretty good and they will waive the legal fees completely. However, we made a mistake when we submitted our application. I put Cint’s employer as Hewlett-Packard. When the bank checked her payslip (we needed to submit latest three months of payslip), it reads Amtek Technologies. They checked with us about the discrepancy, and we said that she was a “contract” worker with HP. Somehow, the bankers thought that she was not a full-time worker and hence her income couldn’t be accounted as a reliable source of income to service the loan. Hence they only calculated the maximum loan amount that we could get from my salary, and of course it was less than $268,000. We still think that the bank screwed up on this matter, and just to flame them, I told them that I was also a “contract” worker in NCC!
So we went to the second bank which is DBS/POSB. They didn’t waive the legal fees completely. They would only give a subsidy of 0.4% of the valuation price, which was $1,072. The legal fee itself is $2,350, so we need to pay the remaining $1,278. But, it turned out that actually they had a better rate than StanChart, as they have this package of floating rate but with a ceiling. So, the rate for the first three years is capped at 1.49%. So, in case the market rate shoots up to be more than 1.49%, the plan becomes a “fixed” rate plan at 1.49%. If it is lower than 1.49%, it will follow the market rate accordingly. Of course, after three years it will just follow whatever the market rate gives. But, by then, we could always refinance the loan. So in the end we settled with DBS/POSB. (Until now, I can’t really figure out the loophole of this plan and am still searching for it, as I have an unhealthy level of suspicion towards all bankers, who I assume only wants to rob my money even if I don’t have any.)
After that, we needed to wait for the bank to produce the Letter of Offer, indicating that our loan amount is approved and also the terms and conditions of the loan. We waited for 3 days for the LO, so to be on the safe side, make sure that you have already settled with your choice wihtin the first week of the 14-day period.
The bank will also ask you whether you already have a lawyer to represent you for the purchase of the flat with HDB. And, since most likely you don’t know any, you will just follow with their recommendation. It will be more convenient as well, as they would have known each other.
After you have and sign the LO, now you can sign the OTP and pay $4,000 to the owner as the deposit. Ask one of your friend to sign as a witness. Next, resale application.