“Never assume that all is well when it comes to your savings or loans. Get a printout to ensure you know exactly what is happening.”
– Tagene Brown-McBean
AFTER my article on Buy or Rent property came out a few weeks back a number of people have asked me questions about securing a home loan for purchasing a property. Banks these days offer very competitive loans due to the real estate industry boom. So, what should we consider when choosing loans offered by different banks?
Interest and loan period
The most important factor to consider when taking a loan is the interest rate and the term or period of loan. These two factors go hand in hand. If you want a low interest rate, creditors would want a shorter loan term; and for a longer term creditors charge higher rate of interest because the risk of default is greater when term is longer. For home loans, the rule is no different.
Banks will also offer some flexibility, like fixed interest rate for a certain period of time. For example, for a 5-year loan, the interest rate can be 5% per annum for the first year, but thereafter the rate can change every year. If you want to lock-in your interest rate for a longer period of time, say, 5 years, then the interest rate will go higher. Your cash flow needs to be considered when deciding the term and interest rate. I’d suggest pick a monthly amortization you are comfortable with and a rate that you feel is fair. It would also be wise to compare rates from different banks and pick two or three that offer the lowest rate. Then consider these two factors: Option to pay lump sum anytime and convenience of paying.
Option to pay lump sum anytime
When taking a home loan, the goal should not be just paying it off by the end of the loan period; it should be to pay off at the earliest time possible, well before the loan term is completed. Why? Because the longer you keep the loan, the higher the interest amount you pay. One way to avoid this is paying a lump sum amount whenever you can on top of the monthly amortization. This payment will be deducted from your principal amount and the loan will be re-computed. Most banks allow lump sum payments; however, some would allow it only once a year. So, pick one that allows flexibility in paying off the loan.
An important note on this option: During re-computation of the loan, you will be you will be asked if you wish to lower the monthly amortization and keep the term the same as the original term or reduce the term and keep the monthly amortization pretty much the same as before. If you want to loosen a bit of pressure on your cash flow, you can opt for lowering the monthly amortization. But if you want to save on interest payment, then lowering the loan term would be the option.
Convenience of paying
Paying a loan is already a pain; so the least you would want is any inconvenience in making the payment. The bank granting the loan would require you to open an account in that bank so it can readily draw the payment from that account. You need to make sure that funds are deposited in that account before each due date. So, make sure that the bank has a branch near your home or work place so you don’t need to go out of your way to make the payment. Consider making online transfers, which will help save time and effort.
From a financial planning perspective, a loan is not really the best option when wanting to achieve our goals, but in case you are considering getting one to finally purchase your dream house, it is important to make sure that you understand what you are getting into, and you have a plan for paying it off as quickly as possible.
For any money questions you would want me to help you with through this column, feel free to email me at firstname.lastname@example.org.
Jeremy Jessley Tan is Registered Financial Planner of RFP Philippines. To learn more about personal financial planning, attend the 55th RFP Program this July 30 To inquire, e-mail email@example.com or text <name><e-mail><RFP>at 0917-9689774.