4 Ways To Save On Your Mortgage Loan

Buying a home and taking out a mortgage loan is one of the biggest decisions a person makes in his entire life. With hundreds of thousands of dollars at stake (if not millions), a small mistake can sometimes ripple into an uncontainable damage to your life.

First-time home buyers may face some difficulties understanding the intricate terms and conditions of home mortgage loans, but there are definitely ways for you to get a better deal out of it. It’s about research and understanding how it works. Here’s a look at four ways to help you get a better deal before you sign on for one of the biggest financial commitments of your lifetime.

1. Always Compare Mortgage Loans

While comparing home mortgage loans may seem rather simple since you just have to compare the different interest rates, it’s actually more difficult than people expect because interest rates are always changing. Most borrowers are focused on getting the lowest rate loan possible, but using this mentality can prove to be short-sighted.

For instance, in today’s interest rate environment, fixed rate loans typically seem cheaper than floating rate loans. But, do not be fooled by current interest rates. The majority of economists in a May 2024 Reuters poll believe that the US Federal Bank is likely to cut rates in 2024.  This could signal that mortgage rates have peaked and that they may start to decline over the next few months and years.

This is why you need to take into consideration a number of other factors as well when comparing different loan offers. Think about the interest-rate environment in the next few years and how it might affect your loan rates going forward. A couple important questions you must consider are whether you can take some volatility in your monthly repayments and whether you want the flexibility of refinancing easily.

Related: How Central Banks Move Interest Rates – And Why Investors Should Care

2. Refinancing/Repricing

Once you’ve chosen a mortgage loan, you might think that your job is now done. However, there’s another step: refinancing your home loan can be a significantly economic way to save more money on your home loan, if done properly.

Refinancing means switching to a loan package with a different bank, while repricing (conversion) is when you switch to a different package within the same bank. Even if you can save 0.25-0.5% in interest rate, that could result in massive amount of annual savings since home loans can generally be in the hundreds of thousands of dollars.

This means that you should look for home loans that don’t have too many provisions preventing you from refinancing your loan flexibly. Moreover, after the first few years of your mortgage loan, interest rates on your existing mortgage loan are almost always revised upwards, which means you pay more interest if you simply do not bother to refinance. Some banks do offer a one-time free conversion with their mortgage loan when you first sign up, so remember to enquire about that.

3. Interest-Offset Accounts

An interest-offset account is a repayment account that is linked to your mortgage loan. The account works much like a savings account but allows the borrower to earn a high interest rate that matches her home loan. You can use the account like a savings account and draw on the funds anytime when you need them. Generally, such accounts will benefit those who have spare cash so that they can take advantage of the higher interest rates.

For example, HSBC has an interest-offsetting account called HSBC SmartMortgage. It allows you to earn interest on up to 70% of your outstanding loan amount or deposit balance, whichever is lower. You are then able to use the interest to offset part of the interest payable on your home loan, allowing more of your monthly instalment to go towards paying down your principal.  This means that, just by putting the spare cash you have into an interest-offset account, you actually get to earn some sort of  a “cashback” that can offset what you are paying in mortgage interest expenses.

Related: Which High-Interest Savings Accounts Should You Open and Why

4. Select A Home Loan With Lower Rest

The term “rest” refers to the compounding period, or the frequency, in which the interest on an outstanding loan amount is calculated. All else being equal, the more frequently the loan is calculated, the lower the interest payments will be. This is because it will take into consideration a smaller outstanding loan amount as you pay down the loan over time. Most home loans in Singapore follow a monthly rest, while a few are on daily and annual rest basis.

You may think that the amount you save is small, but this can make a big difference if you decide to make pre-payments. For example, let’s say you have an outstanding home loan of S$500,000 on 1 May. If you make an early repayment of S$100,000 on 15 May, a loan with a daily rest will let you start paying interest only on the remaining S$400,000 immediately. However, a different loan with a monthly rest will still charge you interest on the initial S$500,000 you had on 1 May.

The saving from reduced interest payments could be significant. If you do this a multiple times throughout your 25-30 year home loan tenor, the savings would compound to a meaningful amount.

If you are interested in exploring the best home loans on the market, check out our home loan results page.

Read More:

• A Guide to Finding the Best Loans
• How Much Do You Need To Earn Per Month To Buy A Condo in Singapore?
• Home Loan Basics: Bank Loans vs HDB Loans
• Should You Pay Off Your Monthly Mortgage Early Or Invest?
• Guide to Buying Your First Private Property in Singapore

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