Mortgage Basics

Definition Of A Mortgage

Most property purchases are financed by a loan. A home loan or mortgage is defined as:

A loan in which the borrower puts up the title deed to a property or real estate as collateral for the loan. If the borrower is unable to repay the loan on time, the lender can seize the property and sell it off to pay for the loan.

In other words, you are using your property to secure the loan. Should you fail to repay the loan, the bank can exercise the right to seize your property and sell it off to pay for your debt. It is for this reason that you must carefully plan your finances to ensure you will be able to pay your loan on time.

Basic Components Of A Mortgage

There are three basic components of a mortgage. They are the loan amount, interest rate, and loan term.

The loan amount is the principal amount that you want to borrow. Banks in Singapore usually can give a loan of up to 80% of the property value.

The interest rate is the percentage of annual interest that you have to pay on the loan amount. It can be a fixed rate, a flexible rate, or a combination of both.

The loan term is the duration of time that you take to completely repay the loan. Loan terms usually range from 15 to 30 years.

Combining the principal loan amount and the interest amount will give you the overall loan amount. The home loan is usually repaid via monthly installments. The repayment comprises two portions. One portion is for the repayment of the principal amount. The other portion is for the repayment of the interest. These are the basic details you need to calculate your monthly mortgage payment.

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Uses Of A Mortgage

A mortgage is usually taken up to finance the purchase of a new property or to refinance an existing property.

Initially, most banks offer discount rates for a certain period of time, also known as the lock-in period. The discount rate ceases to be in effect once the loan reaches the end of the lock-in period. The borrower will then refinance to get the lower rates again. In some cases, refinancing allows the borrower to increase the loan amount. Compared to personal loans, mortgages are the cheapest financing option available for most home buyers.