Home loans, part 1

HERE are 10 tips about home financing, especially for those buying HDB flats.

TIP #1: HDB OR BANK?

About two-thirds of all HDB home loans are financed through HDB while the other third are through bank loans.

If you qualify, take the HDB loan. At 2.6 per cent, it is the cheapest loan in town. Banks usually charge at least 3 per cent. It is such a good deal that I suggest you go for the max: A 90 per cent, 30-year HDB home loan.

TIP #2: LIMIT YOUR DOWNPAYMENT

For HDB loans, the Housing Board will take whatever money is in your CPF Ordinary Account and apply it to your downpayment at the time of purchase.

You can avoid this by transferring the money in excess of the required 10 per cent downpayment out of your Ordinary Account and into an investment, like a fixed deposit. Do it just before the first HDB appointment.

After that, you can sell the fixed deposit and the money will go back into your ordinary account.

It is a good idea to keep a cushion in your Ordinary Account. It acts as a kind of insurance in case you hit on hard times and are unable to make regular CPF contributions.

TIP #3: OPTION FEE

If you like a flat, you can reserve it for 14 days by paying an option fee. During that time, the seller cannot sell it to someone else.

If you don't buy, however, you must forfeit the option money. It is up to $1,000 but you can pay less. I suggest paying only $50 or $100.

The seller won't like that, but it's too bad. We are still in a buyer's market. So take advantage of it.

One more thing: Watch out if your property agent says you must pay the maximum $1,000 option fee. This will make you feel more committed to buying the property as it increases the cost of not completing the purchase.

That is good for the agent but not for you. Don't go for it.

TIP #4: IN-PRINCIPLE APPROVAL (IPA)

It is an indication by the bank that it will grant you a loan.

Banks are keen to give IPAs as they know it starts a banking relationship.

It boosts the chances that you will take a loan from that bank.

But not all banks follow through with a loan. Ask around to find out which banks have a reputation for backing out of their IPAs.

Mr Eric Toh, director of Advance Link Property, told me: 'Even with an IPA, financing can fall through. Problems usually come from a spotty employment history or difficulty verifying income, especially for self-employed persons.'

TIP #5: LETTER OF OFFER

This is a more solid commitment. It means the bank has looked at your income and decided to make the loan. A bank can still back out at this stage, but it is less common.

TIP #6: OPTION EXERCISE FEE

This requires you to top up the option fee to a maximum of $5,000. For example, if you paid $50 for an option fee, the exercise fee would be up to $4,950.

Again, 'up to' are the key words. You can go for a low amount - like $50 - if the seller will agree. But at this advanced stage, it is hard to back out of the deal. So you might as well pay more, like $1,000 or $2,000.

Once again, if you back out of the purchase, you lose the exercise fee. You could lose even more, as I will explain.

TIP #7: OPTION TO PURCHASE

You have exercised the option to purchase when you pay the option exercise fee.

It is a binding contract. Backing out now would be serious as the seller cansue for damages. If you engaged a broker, he can also sue to recover the commission he would have earned.

Do not sign an option to purchase or pay an exercise fee if you have the slightest doubt about buying the flat or obtaining financing.

Some agents will pressure buyers to sign a purchase agreement immediately. They may not even mention the option fee and 14-day free look period.

The standard line is: 'If you know you want the flat, why wait?'

This is bad advice. The law entitles you to two weeks to make up your mind.

You lose nothing by taking the two weeks. So take it.

TIP #9: NO NEED TO PAY 1 PER CENT

There is no requirement that you must use an agent to buy or sell a flat. In fact, the agent's and buyer's interests may conflict.

For example, an agent may advise you to take a home loan from a particular bank. But agents typically take a bank referral fee from 0.2 to 0.5 per cent. That could come up to $1,000 on a $200,000 loan.

Agents rarely disclose this conflict to buyers.

To independently verify that you are getting a good deal, compare home loan rates at www.AskDrMoney.com.

By the way, you do not need to pay the standard 1 per cent buyer's commission. Some agents will work for less, like 0 per cent. Even then, agents can earn good money from bank referral fees and splitting the seller'scommission.

TIP #10: VARIABLE OR FIXED?

Two years ago, when interest rates were rising, I recommended fixed-rate home loans.

Now, rates have stabilised and may decline next year. This changes everything and makes variable (floating) rate loans a better deal.

On top of that, the annual interest for variable rate loans is about one-half per cent less.

Advice provided is not meant as a substitute for comprehensive professional advice. E-mail questions to a1admin@sph.com.sg. You can also contact Larry Haverkamp at Mail@AskDrMoney.com.

» Home loans, Part 2: Sell your home the smart way