Published March 22, 2007

Eight points to ponder for home loans


WHEN it comes to home loans, people seem to overlook the basics. But other issues are tricky. Test yourself as we run through eight points to consider before taking on a mortgage.

# Don't follow the Joneses. Don't be tempted to take an over-sized loan that you will find hard to repay. In a market upswing, it is hard to resist buying a bigger home, when everyone around you seems to be doing the same and making wheelbarrows of money along the way. The Joneses might be smiling, but chances are, they're up to their eyeballs in debt.

# Don't think: It can only go up! A market upswing makes normally sensible people delusional. One borrower is so sure that property prices are only going to go up that he put 10 per cent down on a luxury property, betting that the value would rise in the next 30 days when he has to fork out another 10 per cent to the developer. That he is overly indebted and might not be able to get bank financing in 30 days does not seem to cause him any loss of sleep.

# Shop, shop, shop. The Internet has made it a lot easier to shop for a loan. But there are three caveats. First, be thorough. Some think that getting two quotations is enough. It's not, given the dozens of lenders today, with each offering several loan packages.

Second, many banks do not update their websites to show current rates. Third, the advertised rate may not apply to you.

# Defer payment? Some developers offer deferred payment schemes (DPS) where you can defer most of the payment until the property is built (see table). But the developer is also skipping the credit checks that a bank might do. All this makes it easier for you to commit. But DPS might not be a free lunch. Some developers will charge a higher price for property bought under DPS, typically 3-4 per cent more.

You should also be aware of any fine print that might hold you liable if you abort the purchase, beyond forfeiting the downpayment. For example, some developers have a clause that says they hold 'any other rights available at law or in equity' even after you forfeit your downpayment, if they can't sell the property in a down market.

# Know what to compare. Many home loan packages offer indirect benefits, from credit card fee waivers and attractive interest rates on deposits, to a free plane ticket. Be clear how valuable such freebies are to you. Being lured by the plane ticket might mean an unplanned splurge on a vacation, just as you're commiting to a loan.

# Compare apples with apples. Even after discounting the distracting freebies, it's difficult to compare core features. Our dollarDEX Index ranks home loans so that there is some like for like comparison (see

There are only a few core features to consider. First, check the interest rates for the first three years of a loan. Beyond that, all bets are off since banks can and do change rates. The next thing to note is whether the rates are fixed or variable. Then look at other key features with a direct financial impact, like the size of the legal subsidy, and the penalty for redeeming a loan early.

# Ask the right question about interest rates. Should you take fixed or variable interest rate loans? It all depends on whether you think interest rates are heading up or down. Right now, it's a toss-up and even experts can get it wrong.

We think the right question to ask is not where interest rates are headed, but whether you have the time to track them and go through the trouble of refinancing. If you do, consider variable rates. If not, stick with fixed rates.

# View your overall financial situation. Take a holistic view of your finances - your investments, loans, insurance, etc. You want to maximise your return at a risk level you are comfortable with.

If you have spare cash, pay off the loan charging the highest interest rate. Then think about investing in areas that continue to diversify your overall portfolio.

You could even view paying off your home loan as an 'investment' with the returns being the interest saved. Third, think about other opportunities that might yield higher returns. Yes, paying off your home loan gives a sure return, but there may be better investment opportunities elsewhere.