Taking out a home loan or mortgage is a long-term commitment. And so many factors affect how much you end up spending on financing your home purchase. From interest rates and how they are calculated to upfront fees and early settlement fees, you could end up wasting a lot of money if you don’t take the time to compare all of these costs! In our compare to save series, we will show you how you can save by comparing the different facets of home loans.
Save by comparing: interest rates and payment terms
Interest rate: flat or reducing?
When looking at mortgages, it is very important to understand what rate you are being quoted. Banks will usually quote you a reducing rate or flat rate. A reducing rate means you will be charged interest on your outstanding balance and this reduces as you pay off the principal. A flat rate is simply calculated on your principal amount and divided into equal instalments over the duration of the loan tenor. Before you reach for the mortgage with the lower interest rate, check first if it is flat or reducing. Make sure you are comparing all reducing rates or all flat rates and do not mix them up.
Interest rate: fixed or variable?
The second aspect of interest rates to consider is whether they are fixed or variable. Fixed rate home loans are set and fixed over a number of years. While variable rates move as the market rate moves, so your repayments can change as the market interest rate changes. EIBOR (Emirates Interbank Offered Rate) is often used as a benchmark for mortgage variable rates, which means that the rate being charged is set at EIBOR plus the bank’s percentage margin on top.
To better understand what this will mean to you, make sure that you find out exactly what type of rate you are being quoted and for how many years. For example, a mortgage with a fixed rate throughout it’s tenor could cost you more than one with a variable rate. This is because the bank will want to reduce its interest rate risk so it will charge you a higher rate from the get-go. Fixed rate loans with longer tenors tend to cost more than those with shorter tenors for the same reason. On the other hand, variable rate mortgages could be more expensive if interest rates are rising. Some banks will quote you a fixed rate for the first few years of your mortgage and a variable rate after that. So before signing on the dotted line of a mortgage application, compare the cost to you over the life of the loan.
Save by comparing: fees
Fees early on and down the line
Are you aware of all the upfront fees you may have to pay when taking out a home loan? These include arrangement fees – typically 1% of the mortgage, a valuation fee for valuing the property, and an upfront processing fee – again typically 1%. Ask about these fees from the start and factor them into the cost of your mortgage. This way when you compare home loans, you will have a better idea of where you can save money. And what if you decide to sell your home three years into your mortgage or decide to switch mortgage providers? In either case, when you pay off your home loan, you may be required to fork up an early settlement fee. Be aware that although most banks charge around 1% when you repay your mortgage early, this may vary from bank to bank. So before making a decision on a particular home loan, think also of the costs you may have to bear down the line and compare these.
Editor’s tip: Always remember that mortgages are typically large loan amounts with lengthy tenors. So take your time and find out all the relevant information before choosing the right product for you. Understand how mortgage rates are calculated before comparing them and ask about all the upfront fees as well as those you may be charged later on. Finally, make sure you are able to repay your mortgage comfortably before you make that commitment! For more tips on how you can save money by comparing, follow us on twitter and check our #CompareToSave series.