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BUYING a home may be a thrilling experience - until you find yourself in the midst of applying for a mortgage, especially if it is your first ever purchase.

A mortgage is the biggest debt in your life and it is more than just about monthly instalments.

The loan process also involves dealing with things like a redemption penalty, fire insurance, mortgage insurance and choice of conveyancing lawyer.

If some of these things seem fuzzy to you, or you do not know their ins and outs, here is a 10-point guide.

Pre-approval

BEFORE you close a deal to buy a property, approach at least one bank to check if you qualify for the loan you have in mind.

You should do this even if you are confident that your income and age will qualify you for the loan, says Mr James Lee, a director of James Lee Realty.

For some people, a rude shock may lie in wait.

With the setting up of the Credit Bureau four years ago, banks now know the repayment history of loans or credit cards taken up by applicants with other banks.

Did you miss several instalments a few years ago? Have you ever been made a bankrupt but have since been discharged?

If yes, 'banks may not give you a loan. Or they may give a lower quantum than you applied for', says Mr Lee.

Timing of application

BE CAREFUL not to apply for a loan too early if you are buying a property with a deferred payment scheme and you are using cash - instead of Central Provident Fund (CPF) savings - to make the down payment.

Under a deferred payment scheme, you pay a down payment - typically 10 to 20 per cent - on signing a deal to buy. You pay the rest of the purchase price through a bank loan or whatever only when the property has been completed - or, to be more precise, when it has obtained a temporary occupation permit.

Ms Lie Chin Chin, a lawyer at Lie Kee Pong and Partnership, explains that usually a lower interest rate is charged for the first year of a loan.

The clock starts once you accept the letter of offer, which is usually at least two months before the loan is disbursed for completed properties.

However, for uncompleted properties with a deferred payment scheme, the disbursement may be a year later.

In that case, borrowers may not enjoy the lower interest rate at all as one year would have passed.

Worse, Ms Lie says, people who sell their property early have to pay a penalty for cancelling the loan - even if the loan is never disbursed.

The penalty is at a hefty 1 to 1.5 per cent of the loan amount.

The simple solution: Apply for the loan closer to when the deferred payment scheme requires the rest of the payment.

Unfortunately, you cannot choose this route if you are using CPF savings for the down payment as the CPF Board will release the monies only if the loan arrangement is in order, says Ms Lie.

Promotions at showflat

IT IS convenient, but should you sign up for a mortgage with the bank whose officers are stationed at the showflat?

Not really - not even when the bank's loan package is touted as a 'special' deal, applicable only to that project.

'Sometimes the promotional packages offered by the two or three banks at the showflat might not be the best deal,' says Mr Dennis Ng, the spokesman for www.housingloansg.com - a portal that provides analysis of housing loans.

'Another bank which has no tie-up with the property developer may have a better deal.'

After checking around, you can still decide to go for a package offered by a bank with a tie-up with the developer - but it is not necessary to do so with the bank officers at the showflat.

You can still get the package at any branch of the bank, or even through a third-party consultant, Mr Ng says.

Legal fees

A BANK typically has a panel of approved legal firms for you to choose from, for a lawyer to act for you and the bank.

They have been screened for competence and professional indemnity insurance.

But banish the thought that all the firms charge the same fee.

'Sometimes the difference can be between $300 and $500, so shop around,' says Mr Ng.

Strings attached

SOME banks require you to buy a product when you sign up for a mortgage.

Under the 'QuickOwn Home Loan' from OCBC Bank, you have to buy an endowment policy, which is a savings-cum-insurance instrument.

Its premium - running into a few hundred dollars a month, depending on factors such as the size of the loan - is payable for 12 years.

You have to pay even if you should turn to another bank subsequently for a mortgage in a few years, says Mr Ng.

If you terminate the endowment policy, you will get back much less than the premiums you have paid.

In fact, you do not break even until close to the 12th year, a feature shared with some endowment policies sold elsewhere in the market, says Mr Ng.

'You have to plan your cash flow properly, or hope you don't lose your job or your cash flow is disrupted in any way,' he adds.

From OCBC's perspective, the endowment policy's annual bonus payouts will help the borrower pay off his loan faster.

When the policy matures, the entire sum insured, plus bonuses at that time, will also go towards reducing the outstanding loan.

At United Overseas Bank (UOB), you have to park at least $50,000 cash with the bank for a year if you sign up for its First Zero Home Loan.

Your deposit will earn less than 1 per cent a year in interest.

Another example from a few years ago: A certain bank required clients to buy mortgage insurance from a certain insurer, says Mr Ng.

The bank paid the premium to cover the entire period of the loan - which could be around, say, $15,000 - to the insurer at one go.

The bank then deducted the part of the premium, along with the mortgage repayment, through monthly instalments from the client.

When clients refinanced their loans with other banks in later years, some of them were surprised to discover that they had an outstanding insurance premium to pay the original bank, says Mr Ng.

'No bank was willing to finance this insurance sum. The clients had a nasty shock because they had to pay cash.'

Interest savings

WITH interest rates as high as they are now, at between 3 per cent and 4.5 per cent, it is worth considering loan schemes which allow you to park some money with your mortgage bank, says Mr Ng.

Your deposit, which is parked in a current account, is paid the same interest rate as you are charged for the mortgage.

In other words, you earn a higher interest than if the cash were kept in a savings account earning peanuts - around 0.25 per cent a year - with that bank or any other bank.

This is money that you are not using for buying your property because it is for daily or emergency use, and you want to be able to tap into it any time.

This scheme makes sense to people like businessman Christian Chua, 39, who has a pile of cash and owns a semi-detached house mortgaged to HSBC Bank.

Aside from HSBC, banks which offer this 'interest offset' feature in their home loans include Standard Chartered Bank, UOB and Citibank, says Mr Ng.

Aside from this scheme, you can also save interest by simply bargaining with the bank for a lower mortgage rate, especially if you are taking out a big loan such as $1 million or more, says Mr Lee of James Lee Realty.

An industry source has a cautionary word about 'special' floating-rate packages taken from foreign banks, which she says are generally known to be 'more sensitive to interest rate rises' compared to local banks.

In other words, foreign banks may raise rates faster than local banks.

She cites the case of someone who took up a package charging 1.5 per cent a year in interest.

To the borrower's horror, just three months later, in August last year, the interest was doubled to 3 per cent.

Within six months, it was raised to 4.5 per cent.

The borrower was stuck with the package as she had to pay a penalty to switch banks.

Mortgage insurance

SHOULD you take up this insurance?

It's a strong 'yes' for most people, says Mr Leong Sze Hian, the vice-president of the Society of Financial Service Professionals.

That is because the insurance will pay the outstanding loan if the borrower dies or suffers total and permanent disability.

Without the insurance, if the borrower's dependents cannot continue to service the loan, the house will have to be sold to pay off the loan.

Mr Leong says: 'People don't take mortgage insurance seriously. I know someone who has a $1.1 million mortgage and he doesn't even know if he has mortgage insurance.'

Mortgage insurance is compulsory for HDB flats whose mortgage is serviced monthly with CPF savings.

The insurance is not compulsory for private properties.

The insurance premiums are not sky-high.

Take a male aged 30 with a mortgage loan of $200,000 at a loan rate of 5.5 per cent and repayable in 20 years. NTUC Income will charge him an annual premium of $156.65.

Redemption penalty

THIS is imposed if you pay up your loan in full or jump banks before the expiry of a lock-in period - usually two or three years.

The penalty ranges from 1 to 1.5 per cent of the outstanding loan amount. So, for $500,000 the penalty is between a not insignificant $5,000 and $7,500.

The penalty clause comes with loan packages whose interest rates are fixed, instead of varying with market rates, for the lock-in period.

Unlike in the past, it is common for floating-rate packages now to have lock-in periods, says Mr Ng.

Banks that do not impose any penalty for early redemption are HSBC and Lloyds TSB.

Mr Ng says the interest rates for no-penalty loans may not be the lowest in town, though.

Still, they are attractive to certain types of customers such as speculators who plan on selling their property within a short period of time.

Others may expect a lump sum coming their way - such as the sales proceeds from another property or an inheritance - soon.

Freebies

FROM time to time, banks will offer freebies such as a free credit card and lower interest rates for renovation loans to draw you into signing up for one of their mortgage packages.

In comparing different loan packages, do not be overly excited by the freebies. 'Most of the time, it's not worthwhile choosing a loan package based on the freebie offered,' says Mr Ng.

Fire insurance

THIS insurance cover is mandatory if your property is mortgaged to a bank to ensure that the bank's collateral is not jeopardised in the case of a fire.

Typically, the bank will pay the premium for the first year, and you have to pay in subsequent years.

The deduction for the premium is usually done by the bank, so you do not have to make any effort to renew the coverage.

The Association of Banks in Singapore says the cover for mortgaged condominium units is based on the cost of reinstating the property following a fire or the loan quantum, whichever is lower.

For other private properties, it is based on the reinstatement cost.

NTUC Income charges $170 in annual premium to cover $100,000 for the rebuilding of a private property and $60,000 to replace its contents.

chanteik@sph.com.sg