Home loans is another obligation you need to consider before you dive in with your application. It is crucial to think about the penalties, subsidies, fixed or floating interest rates, loan term, lock-in period, and other loan package offers.
But before anything else, here are things to look at before applying for a home loan.
- The Pros and Cons of Fixed and Floating Rate
A fixed rate indeed comes with a larger interest rate, but you’ll receive constant interest rate charges monthly. You can budget your home loan payment ahead of time.
On the other hand, when you go with the floating rate, the interest might be lower, but no one knows what will happen in the future. No one can predict whether the interest rate might go up or down.
- Your Home Loan Term
Of course, before applying, you should know whether you are capable of paying the full amount in 10 to 35 years. When you choose a longer-term, you will pay a lesser amount monthly, but you will pay higher total interest rates in several years of payment.
The bank will consider your age before accepting your application. The typical loan term is 15 years. So, if you are ahead 50, there would be a high possibility of your loan getting rejected.
- Other Home Loan Payments
When buying a property, you also need to pay for the legal, fire insurance, and valuation fees.
When it comes to the lock-in period, you are going to decide when you will sell the property based on your observation on when the interest rates will go up. There will be higher interest rates if you choose a shorter lock-in period.
Also, selling the mortgage when you are still in a lock-in period comes with a penalty of 0.75% to 1.5%.
- The Home Loan’s Total Amount
Banks usually loan 75% of the property’s amount for first-time buyers. However, the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) will compute the total ratio of your monthly income and your current debt obligations.
That’s why it is essential to pay as much as you can for your current debt obligations, such as credit card bills, educational loans, car loans, and business loans. The total of your debt should not exceed 60% of your monthly income.
- The Interest Offset and Interest-Only Packages
Banks offer loan packages such as the interest offset feature where they will use the amount of deposit from your bank to cover up with your home loan interests. However, that will only be effective if you have a larger maintaining balance on your account.
Investors who want to minimize the cash outflow might opt with the interest-only packages. With that type of loans, the buyer will only pay the interest amount for a certain period. But the borrower will pay for regular interest rate including the principle loan.