Ever heard of "Mortgage Choice"?

By The Folks @PropTalk - June 22, 2015 No Comments

While flipping through Zaobao this morning the wife and I came across an article about "Mortgage Choice", a little-known loan product which OCBC has supposedly been offering since last year. 

Unlike the standard mortgage available in the market where borrowers have to pay the full monthly principal + interest components, "Mortgage Choice" allows for some flexibility in repayment of only a portion of the actual monthly principal for an initial fixed period. According to what we have read, the fixed period is usually 2 to 3 years while the monthly repayment for the fixed portion of principal can be as low as $500. However, the mortgage will revert to the standard P+I payment after this period, which means you will have to pay a larger monthly installment for the balance tenure of the loan compared to a standard mortgage... not to mention more interests since the bulk of your principal is "rolled over" to after 2 to 3 years later.

The numbers certainly sound tempting for the initial fixed period: A $1 million mortgage at an interest rate of 3-month SIBOR (currently at 0.8%) + 0.85% for a 30-year loan tenure will work out to 1.65% in annual interest rate payable. This translates to a monthly loan repayment of $3,793 under a typical mortgage package, which comprises $1,375 in interests and $2,418 in principal repayment. But under "Mortgage Choice", you supposedly only pay $1,875 monthly - more than 50% less than a typical loan. 

According to loan brokers, such "low principal" loan products may see strong demands going forward due to the impending FED rates increase and especially with those who are financially unstable or in need of cash flow.

Although the article did mention from the onset that "Mortgage Choice" is unlike the notorious "Interest Only Loan" (or "Balloon Payment", which some of you may be more familiar with the term) that was prevalent back in the mid-2000s  (* Hey, borrowers still have to make SOME principal repayment monthly, you know?! *), the wife and I cannot help but compare this with the proverbial rose - minus the "sweet smelling" reference. 

We also wonder if the bank concerned may have stepped into some "grey area" by offering a product as such. Then again, we can reasonably expect "the world's strongest bank" to know exactly what they are allowed/disallowed to do under MAS regulations.

What the wife and I are more concerned about is the kind of third-party advertising that you find regarding mortgages such as "Mortgage Choice". As you can see from one such that we have pulled from the web, the broker will only trumpet about the "low monthly repayment and savings you get for the initial 2 to 3 years so you will have more cash in hand to invest or for other commitments" with no caveat about the much higher monthly repayment or the additional interests that are incurred after the "honeymoon" period. 

This is where the less financially savvy borrowers may run the risks of being ill-informed by the very people that supposedly provide you with the best loan deals in town...

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