[_CPCG_]

By: Zeng Han Jun, CPCG, Singapore

A good mortgage is not just about the rates. The lower rate does not translate immediately to being a good package. Let's think about it for a moment, if a bank decides to lower its mortgage rate for a particular home loan - much lower than its competitors. What does the bank earn? If the bank cannot earn from you at the designated low interest rate, could it try to think of any other method to earn from you? Of course it does!

Many of these low rate home loan are packaged with all sorts of terms and conditions. Here is a real life example: An ex client of mine got himself a really low interest rate mortgage. However that rate only stayed fixed for the first year, and he has to lock himself in with the bank for the next 3 years. The rate for the next two years was structured as floating rates, meaning that they could change anytime. If it goes down, you win. If it goes up, you lose. Simple as that.

Attracted to the first year rate, he could not resist the temptation and took up that package. You see, many instruments in the financial market are constantly changing and mortgages are one of those few that will be able to offer you something fixed for a certain period. Getting a well structured mortgage gives you a peace of mind and allows you to focus on other investments. Why give yourself more headaches by taking up something unfixed when everything around you is already so uncertain?

The rate went up drastically in the second and third year and ate into his existing income. As he had monthly saving plans, insurance and a couple of other stuffs to clear off, his disposable income had to take the hit.

It was not that bad for him, but you can imagine that things could get worse with a couple of unforeseen circumstances thrown in. What if he has to take a pay cut, and still has to clear all the debts and insurance? Throw in a son who is going to study in university this coming August. You get the idea.

Sure, you might be thinking of refinancing. A word of caution: Normally banks offer you low rate as a teaser, and they will lock you in with all sorts of terms, claw backs and conditions. If you decide to refinance after enjoying the low teaser rate, you will realize that you might have to pay off a hefty amount of "fine" to your existing financier before moving to the next one. Mathematically speaking, that move might not be so appealing after all.

The only way to save yourself from all these sort of troubles is to do it right the first time.



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