Diligence in comparing different home loans to assess best fit may give you better savings over the long-run
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By Ravi Philemon
WHY DO DIFFERENT MORTGAGEES OFFER DIFFERENT RATES?
If you have been shopping around for best home loans you may have noticed that different banks offer different rates and that even these may greatly vary at different points in time. The one big reason why this is so is because mortgages are complicated business and in this industry, there is no such thing a ‘one-size-fits-all’ approach.
From local and foreign banks, to financial institutions, and credit cooperatives, there are many players in the mortgage business. These players have different amounts of funds at their disposal at different points in time, and based on supply and demand, these lenders offer different rates and repayment schemes.
The better known names of these lenders may offer higher rates in exchange for their perceived trust and familiarity of their brand. While smaller players may offer near-rock-bottom rates just to stay in contention with the ‘big boys’. Whatever it may be, there is big competition among the mortgagees and this is good news for the mortgagor.
HOW DO I DETERMINE WHICH RATE IS GOOD FOR ME?
The industry players offer different rate types such as 1-month Singapore Interbank Offered (SIBOR), Swap Offered Rate (SOR), 18-month Fixed Home Rates (FHR18), and floating rates.
SIBOR and SOR are open to public scrutiny as they are determined by the interactions between multiple banks. These rates are therefore quite popular among home buyers as they offer transparency and security for the mortgagors.
Fixed Home Rates (FHR) means the interest rate of the property loan is pegged to the bank’s fixed deposit rate. The FHR is usually followed by a number (such as 18). The number denotes the average fixed deposit rate over a given period. This means that the FHR 18 is pegged to the lender’s 18-month, average fixed deposit rate (which would differ from FHR9, and so forth).
There are some inherent risks in FHR as the mortgagee can unilaterally exercise control over the interest rates, thereby increasing costs for the borrowers. But financial institutions are often not very inclined to raise such rates because by doing so they increase costs to themselves.
Floating rates which are usually offered with a ‘lock-in’ period may charge lower interest at the outset, will fluctuate on a daily basis as the SIBOR or SOR rates move up or down. As such, floating rates could rise above the fixed rates or could drop even lower.
DIFFERENT MORTGAGE RATES FOR DIFFERENT BORROWERS
Also, be mindful that not everybody qualifies for the same mortgage rates. That’s because lenders use different tools and models for assessing risk, and for pricing loans based on the perceived risk the borrower brings. The interest rates your mortgagee offers you are partly determined by your credit score, your debt to income ratio, and the amount of money you were planning to put down on the loan. These are some of the strongest factors that influence rates (though they’re not the only ones).
The bottom-line is, different mortgage rates for different borrowers is good news for the mortgagor. But you have to be diligent in comparing the different home loans to see which fits you best and gives you better savings over the long-run.