You will compare two loan offers on total cost and flexibility, not just the first-year rate.
By now Jason and Mei had notes on both offers: the rates year by year from lesson 8.1, the lock-ins and penalties from lesson 8.2, and the clawbacks and conditions from lesson 8.3. The notes were on three different pages, in two different formats, and they still couldn't say which offer would cost them less. The broker's answer, "B is cheaper", was based only on the first-year rate.
This exercise puts both offers into one table and turns the rates into instalments, so you can compare total cost and flexibility instead of a headline rate. Allow about 25 minutes. You need two loan offer letters, or two offers you've been quoted with their full terms, and a spreadsheet.
Make a table with one column per offer and these rows: rate for each year shown, benchmark, spread, lock-in period, prepayment penalty, clawbacks with their periods, cancellation fee, other fees, and conditions such as insurance, linked accounts or minimum loan size. Fill it in from the letters, with the page number beside each entry.
Jason and Mei's table, using the example figures from this module, looked like this in its key rows. Offer A: 2.6% fixed for years one and two, then 3M compounded SORA plus 0.8%; two-year lock-in; 1.5% penalty; S$2,000 legal subsidy and free valuation, clawed back within three years. Offer B: 3M compounded SORA plus 0.5% for years one and two, then plus 0.8%; three-year lock-in; 1.5% penalty; no subsidy; salary-crediting account required.
A spreadsheet's PMT function gives the monthly instalment for a loan: =PMT(rate/12, number of months, -loan amount). For the floating parts, you'll need to assume a benchmark level. Use the current one from MAS's website, and remember it will move.
For the example, assume 3M compounded SORA stays at 2.0% for three years. It won't, but it gives a like-for-like starting point. That makes Offer B 2.5% in years one and two, and both offers 2.8% from year three.
For years one and two, on S$600,000 over 300 months: Offer A is =PMT(2.6%/12, 300, -600000), about S$2,722.02 a month. Offer B is =PMT(2.5%/12, 300, -600000), about S$2,691.70.
For year three, the rate changes, so work out the balance after 24 months first. =FV(2.6%/12, 24, 2722.02, -600000) gives about S$565,007 for Offer A, and the same with Offer B's figures gives about S$564,557. Then use PMT on that balance over the remaining 276 months at 2.8%: about S$2,778.88 a month for A and S$2,776.66 for B.
Over three years, Offer A's instalments total about S$98,675 and Offer B's about S$97,921. Offer B costs about S$754 less, under the assumption that SORA stays put.
Now test the assumption. If SORA rose to 3.0% at the start, Offer B's rate in years one and two would be 3.5%, and its instalment about S$3,003.74, roughly S$282 a month more than Offer A's fixed S$2,722.02. That's what the fixed rate in Offer A protects against.
Plans change, so work out what leaving would cost under each offer at a point that matches your situation. Jason and Mei might move within three years, so they chose month 30.
Under Offer A, the two-year lock-in would have ended, so there'd be no prepayment penalty. But the legal subsidy clawback ran for three years, so they'd repay S$2,000, plus the valuation if the clause covered it. Under Offer B, month 30 was still inside the three-year lock-in. The balance then would be about S$555,750, and a 1.5% penalty on it would be about S$8,336.
So Offer B was about S$754 cheaper over three years if rates stayed flat and they stayed put. If they sold at month 30, Offer A would cost them around S$6,300 less to leave. If SORA rose, Offer A's fixed rate would also protect them during the first two years.
Every empty cell or unclear term in your table becomes a question. Jason and Mei's included: whether partial repayments were allowed penalty-free after the lock-in, and with how much notice; whether Offer A's clawback included the valuation; and what would happen to Offer B's rate if they stopped crediting salary to the linked account.
Send the questions before you accept, and keep the answers with the offer letters.
You finish with one table covering both offers: rates for each year, benchmark and spread, lock-in, penalty, clawbacks, fees and conditions. Under it sit the instalments for the first three years from PMT, with your benchmark assumption stated, and the cost of leaving each offer at a point you chose. Then your questions for each bank, and two sentences on which offer you'd accept and why.
There's no right answer that applies to everyone. Jason and Mei's choice depended on how likely they were to move and how much a rate rise would hurt their monthly budget. Yours will depend on your own plans, and the table is what lets you see that clearly.
Complete the loan comparison table for two offers and write which you would accept, with the reason in two sentences.
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