Salient features of the different types of Mortgages

Salient features of the different types of Mortgages

There are many different types of mortgage packages available in the market today. Here, we highlight the different types of packages and features that banks currently offer in Singapore. Some mortgage packages have a combination of the features highlighted here.

Salient features of the different types of Mortgages –

(a) Capital and Interest Mortgage: This is the standard mortgage package. Monthly payments are made towards paying both the interest and the principal. Each monthly payment is equal, so in the early years of the loan term, a larger portion of the monthly payments goes towards interest payments. And the principal’ payment portion gradually grows larger over the loan term. At the end of the loan term, the debt would have been fully repaid.

(b) Cash Back Mortgage: In a cash back loan, the lender gives a portion of the loan back to the borrower in cash. In such an arrangement, the borrower is typically tied to the loan for a certain lock-in period.

(c) Combo/Hybrid Mortgage: A combo/hybrid mortgage allows you to divide your total mortgage loan into separate portions and apply a different loan package to each of them. It could, for example, be a two-part loan with one part based on a fixed-rate package and another part based on a floating rate package.

(d) Interest-offset Mortgage: Recently many banks have started offering interest-offset packages where you can get the same interest rate on part of your deposits that you can use to pay for your mortgage loan. Typically the ratio is 2/3 of your deposit, so it doesn’t fully offset your mortgage interest amount. The remaining portion of your deposits will have a lower interest rate. This is to attract people who have a lot of cash sitting in the bank with very low deposit rates.

(e) Interest-only Mortgage: As the name implies, there are no principal payments during a part or the whole loan term and the loan balance remains unchanged during that period. The monthly payments are used only to pay for the interest. The full loan principal is then paid off at the end of the loan period – or typically the loan is just refinanced.

(f) Fixed Rate Mortgage: For somebody who wants to be sure exactly how much his/her monthly payments will be and not worry about interest rate changes, there are fixed rate home loans packages available. Fixed rate packages offer a fixed interest rate for a certain period, after which it becomes a floating-rate loan. Fixed rate loans also typically come with a lock-in period and early repayment Penalties.

Fixed rate packages in Singapore are only offered up to a 3-year period, so the types of 20 or 30 Year fixed rates packages offered in many other countries are not available here.

(g) Payment Holiday Mortgages: This is more of a loan feature than a loan type itself, but many loan packages offer a possibility to take a break from monthly payments sometime during the loan term. This can be, for example, 1 or 2 monthly payments every year.

(h) Variable Rate Mortgage: In a variable rate housing loan, the interest rate can fluctuate during the loan term. The interest rate is calculated based on a reference rate and a margin. The reference interest rate is either the bank’s internal lending rate SIBOR. If the reference rate is SIBOR, the loan interest rate is adjusted every 3 or 12 months (depending which SIBOR the loan is tied to). If the loan is tied to a bank’s internal rate, the bank usually gives at least one month notice to the borrower. Variable rate packages can typically be repaid early, except in cases where the margin is lower for a given lock-in period.