Home loan terms you should be familiarise yourself with

It may be confusing but we still need to understand this.  Mortgage is not something we should play around with, it determines our spending power each month and determine how soon we can be financially free.  As such it is of essence for us to understand some loan terminology before we embark on the best home loan search.

Fixed or floating interest rates

Fixed rates as the name implies, means that the interest rates charged are constant.  Typically they are not constant all the time, but they do not typically move month by month.  Most banks offer fix rates on a yearly basis.  Meaning, the rates are of a certain rate in year 1, in year 2 it may be revised to a different rate.  However within that year, the bank or financial institution commits that they will grant the customer a certain rate.

Floating interest rates moves with market condition.  Usually this is tied to the interbank rates such as SIBOR (Singapore Interbank Offered Rates) or SOR (Singapore Swap Offer Rate).  Banks charge a premium on top of these interbank rates.  

As logic would reason, interest rates fluctuates up and down every single day.  It is thus a greater risk for banks to offer a fixed interest rate to its customers.  As such fixed rates are typically higher than the floating interest rates. 

Loan Duration

This is the period that you intend to borrow the money for, i.e. how long will you be committed to return in full the loan amount.  The longer the loan duration, the higher is the total interest paid in total, although your monthly instalment will be lower.

If you are able to commit to return the money within a shorter period of time, your overall interest rates will be lower. 

Penalty for early repayment

As banks typically offer very attractive interest rates in the beginning of their loan tenure, they have designed loans to protect themselves from customers who move to other banks within a short period of time.  As such, fine prints always indicate certain penalty when the loan is exited within a short period of time.  Typically these are pretty hefty.  Check carefully all fine prints before committing to a loan. 


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