sg Drawbacks: If the monthly instalment you have chosen to pay is lower than the monthly interest accrued, the unpaid interest will be added to the loan outstanding. In the long term, you end up paying more in interest.
To start with, the interest rates are higher than some other mortgages: a fixed 3.99 per cent a year for the first year and a fixed 3.93 per cent for the second and third years.
By contrast, you can get fixed interest rates elsewhere pegged as low as 3 per cent a year, says Mr Ong.
He says a foreign bank, whose identity he declines to disclose, introduced it recently and he has handed nearly $10 million of business to the bank.
This 3 per cent package is great for anyone who wants the lowest fixed-interest charge, and who is worried about interest rates climbing higher.
A closely comparable offering is the DBS package whose effective interest rate is 3 per cent a year for three years - at least for now. The package has two parts: 25 per cent of your loan is at a floating rate of zero per cent and the rest at a fixed 4 per cent.
It is uncertain if the floating rate will rise. If it does, you pay more interest on a quarter of your loan.
Fixed-rate packages are not for everyone. If you reckon that the interest rate cycle will turn down in the short term, and there are people who believe it will, you would want to go for floating-rate packages, instead of fixed-rate ones.
Interest-offset mortgages
Key feature: This package is attractive to people who have substantial cash.
'A rule of thumb is you can consider this package if you have cash equivalent to at least 20 per cent of your loan,' says Mr Ng.
You effectively do not pay interest on a sum of your mortgage that is equivalent to the money you have deposited in your current account with the bank. Typically, that has been the case but Standard Chartered Bank revised the terms recently such that only two-thirds of a client's cash balance (up to the loan amount) will offset the interest on the mortgage.
Benefits: Aside from interest savings, you are effectively paying off a bigger portion of your principal, which will lead to you paying off your loan faster.
The scheme has another appeal: you have the flexibility of drawing down your cash deposit, so this is unlike a conventional repayment where your cash is no longer liquid.
Among the people who will find this mortgage attractive are businessmen, who need to maintain sizeable sums of ready cash for business needs, and investors who are waiting for investment opportunities. 'This package allows them to make their monies work harder in the meantime,' says Ms Lie.
Drawback: The interest rate on this mortgage is higher, at about 0.5 percentage point more, says Mr Ng.
Lloyd's interest-only mortgage
Key feature: For up to 30 years, you pay interest only, and then repay the principal in a lump sum.
The long interest-only period offered by Lloyds TSB is most liberal, unlike most packages which allow you to pay interest only for a year or up to three years, says Mr Ng. And typically, they will extend such an offer only for owner-occupied packages.
Benefits: The Lloyds package is mainly for people who have rented out properties, and are high-income earners in high tax brackets, says Mr Ng. They benefit through savings in income tax as the interest portion of loan instalments for investment properties is tax-deductible.
Through an interest-only repayment scheme, property investors can maximise their tax deduction, he adds.
He explains that in normal mortgages, the portion of the loan instalment that goes to cover interest shrinks over time as more of the loan repayment goes to reducing the outstanding principal. The interest that is tax-deductible decreases, unlike in the case of Lloyds' package.
This package works well not just for long-term investors of properties but also short-term ones, says Mr Ng. By paying back only the interest, the investors experience lower cash outflow until they dispose of the property. 'As a result, they may be able to invest in two properties at the same time, instead of one.'
Drawback: The floating interest rate is 4.9 per cent a year - sharply higher than that of normal floating packages. That means some tax savings will be eroded by the extra interest cost.
UOB's First Zero scheme
Key feature: You pay no interest in the first year, so all of your instalments go to cutting back on the principal.
Benefit: If you are looking to refinance your existing loan for just one year before switching to another bank, this mortgage is attractive, says Mr Ng. Or if you are planning to sell your property within a year or two.
Your cost is just the redemption penalty of 3 per cent, which effectively means your interest rate in the first year is 3 per cent.
That is among the lowest rates, if not the lowest, you can find.
Drawbacks: If you hold your property beyond the first year, the interest rates payable are high: 5.75 per cent and 6 per cent in years two and three, respectively.
That is why this package is not for you if you are planning to hold your property for the long term, says Ms Lie.
You can easily find fixed-rate packages with much lower interest costs over three years than this one from UOB.
chanteik@sph.com.sg
