Home loan: Other things to consider

In previous posts, I considered the loan amount, how much should we commit ourselves to if we do have some cash for the downpayment, and decided that we are clear that our aim to minimize the size of debt. And then I considered between a fixed and floating rate package, and decided to pick the floating one, given the current offers by the banks for now (in different circumstance, decision might differ).

What are the other things to consider?

Some banks offer a choice between a zero entry package (ZEC) and non-ZEC. Entrty costs includes legal fees, stamp duty, and valuation fees. Entry costs depends on the loan amount, but typically a 200k loan may cost around 4-6k. There’s a difference between free entry cost and entry cost is financed. For the former, the bank really is picking up the bill. For the latter, you’re still paying for the costs, except it’s added inside your loan amount. If a bank offers both options, the profit rate (or interest rate) would typically differ, with the ZEC package having a higher profit rate, typically by 0.2%. You can try to compute how impact would this 0.2% to the monthly installment (for the whole tenure) and compare that to estimate of the entry cost (as the loan officer to estimate). I usually use this calculator to estimate the monthly installment.

Some banks give you option whether to take up MRTA, but some make it compulsory (surprise surprise). MRTA stands for mortgage reducing term assurance (sometimes known as MRTT – mortgage reducing term takaful), which covers the amount of your loan in the event of your demise. MRTA need not be full at 100%, it could also be at 50% of the amount. The amount would depend on your age and the loan tenure (more reason to aim for lower tenure period), and if it’s a joint-loan, and both person would like to get insured then the MRTA would double accordingly. For a single person, say age 30, loan period 20 years, 100% coverage, MRTA is estimated to be about 3-5k. MRTA can usually be added in the loan amount.

Some banks offer flexi facilities with their package. Three examples. Bank A ties up the loan account to a current account, and the interest is computed based on the balance of both accounts. The more amount you have in the current account, the less interest you’d be paying. I’m not sure how much impact this would have to the bottom line, but the bank will surely be happy to have your deposits! Second example, bank B who allows overdraft facility where you can withdraw amount from the loan account when you need the cash, and likewise deposit more into the account to reduce the interest. Third example, bank C have ‘holiday months’, when you can opt to skip November and December installments each year because people typically need more cash these two months. Of course, the number of months remains the same, so the tenure is likely to be longer and following that, the interest amount is also higher.

Some banks offer tiered rates, for example first 3 years BLR-2%, and thereafter BLR-1%. Or first 5 years fixed at 5% and thereafter BLR+1%. In cases such as this, it is likely that they will have an exit penalty clause. If you want to settle (to refinance maybe) before 5 years for example, there will be some penalty involved when they compute the rebates. Well, sometimes even if there appear to be no fixed cost to the bank (for example ZEC or tiered rate), they may still have this exit penalty clause, so it’s best to check.

In other words, there’s quite a lot of options (450 packages, according to Fiscal-Wise, though of course same bank offering different rates for different loan amount is considered as two different package) to choose from, depending on your needs and preferences. A home loan is a big commitment, so do your shopping and surveying well before committing. Good luck!