It’s almost Chinese New Year! Singaporeans love a well-renovated, well-furnished home for the occasion. We’re especially looking at you, recent home buyers: the ones who are so proud of your first house, you’re trying to cram two IKEA stores worth of fittings into the bathroom alone (unless you’re minimalist. In that case, the interior designer will get you less stuff, but it will somehow cost even more). Here are the loan mistakes to avoid when the bills come:
1. Not using up the renovation loan first
A common mistake is to start using personal loans, credit cards, or other such facilities before using the renovation loan. That’s a bad idea.
A renovation loan has a typical interest rate of five per cent per annum, and can go as low as under three per cent. By comparison, personal loans are around six to nine per cent, and credit cards are around 26 per cent.
The kicker is that renovation loans are capped at $30,000 or six months of your income (whichever is lower). This may not be enough if your contractor / designer busts the budget; an event that seems to happen about as often as the sun rising tomorrow.
The key is to use up the cheaper renovation loan first, and then resort to options like personal loans if you still need more credit afterward.
2. Using in-house financing
Most of the time, in-house financing is more expensive than what the banks offer. When comparing, take note of the Effective Interest Rate (EIR) of the in-house financing. This takes into account the effect of compounding interest over time – and while banks are required to show the EIR of their loans, in-house financiers may not be so polite.
There may also be other contractual tricks involved, such as using rest rates, or imposing fees to roll-over the debt.
In short, you’re more likely to be ripped off by in-house financing. If you can’t get a loan from the bank, we suggest you put a pause on the renovating, save up, and then pay for it later.
3. Taking the first renovation loan that comes along
It’s not uncommon for banks to cross-sell. If you’ve gotten a home loan from a bank, you may be offered a renovation loan to go with it.
It may be convenient to just sign off on it, but don’t. Using loan comparison websites, it only takes a few minutes to look for the lowest rate loan. These days, you can even apply for it just from your smartphone.
Note that there’s zero advantage to taking a renovation loan with a higher interest rate – so you may as well compare online and just use the cheapest.
4. Thinking the credit card instalment plan means you’ll be charged monthly
A lot of credit cards have interest-free instalment plans, especially for home furnishings. But before you buy that TV or sofa, note that monthly instalments doesn’t mean your card is charged each month.
When you use the instalment plan, the entire cost of the purchase is immediately charged to your card. Then it’s up to you to pay the monthly instalments, or else the interest rate reverts to normal. This means there are two things you need to consider:
First, your credit ceiling might get maxed out, because the whole purchase is charged to your account at once.
Second, you really need that warranty. If you buy something defective, you can’t just “stop payments” – you’ve already charged the full cost to your credit card. That can mean six months of payments for a piece-of-junk dining table that sags.
Think it through, before going crazy with the instalment plan.
5. Making multiple credit inquiries over a short time, to borrow for your renovations
When you make multiple credit inquiries (e.g. try to get different personal loans at different banks), it gets noticed. An algorithm – a super-secret program monitoring your loan activity – will identify you as being credit-hungry. This lowers your credit rating, and affects your ability to get other loans.
That’s the last thing a home buyer needs: the crater-sized impact made by a recent home loan s disruptive enough.
If you need to try and find so many loans, it may be a sign that you need to put a pause on those renovations. Maybe just fix up one or two rooms, and save up to renovate the rest later.
How are you planning to renovate this CNY? Voice your thoughts in our comments section or on our Facebook community page.
If you enjoyed this article, 99.co recommends 5 Renovation Tips that can Destroy your Property’s Resale Value, and How to Do Up Your Home Without Needing a Renovation Loan
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