Home Loan | Commercial Loan | Refinance Loan | *Financial Planning http://www.iCompareLoan.

com/ +65 9782 8606

Home Loans With Different Rests: Computing Their Effective Rates By PEARL LIM

In my last article, I explained the difference between effective and nominal interest rate. Basically the latter usually does not reflect the true cost of borrowing.

Banks or financial institutions use different reference rates to communicate the cost of borrowing to customers. In Singapore banks can use the effective interest rate or the nominal rate. However, for licensed moneylenders, they are mandated by law - since 1 June 2012 - to show the effective interest rate. For more details, refer to the Ministry of Law web-page:Amendments to the Moneylenders Rules to take effect from 1 June 2012, or the Insolvency & Public Trustees Office: What Borrowers Should Know About Effective Interest Rates.

Elsewhere in the world, banks may use the nominal rate per annum (p.a.) but calls it by a different term. For example, in Canada, Hong Kong, UK and US it is known as the Annual Percentage Rate (APR).

In Australia, borrowing costs are reflected to borrowers in the Comparison Rate which takes into account the "hidden" costs like the upfront fees and charges on top of the interest rate and frequency of repayments.

Join us | Login for Financial Advisors |

SMS us at +65 9782 - 8606

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning http://www.iCompareLoan.com/ +65 9782 8606

Returning to Singapore, given that it is not legislated that banks provide the effective rate on their loans; this article attempts to set forth the steps to calculate the effective rate for mortgages on different rests but with monthly instalments.

Equivalent Nominal Rate (ENR) To make a fair comparison between housing loans on different rests basis but with the same number of instalment periods, we first have to find the Equivalent Nominal Rate (ENR) per annum.

But before we do that, we need to know what is the present value factor (PVF) of an annuity. In mathematical notation it is defined as

rn rn Present Value Factor ( PVF )=( 1 ( 1+ ) ) m m ( m) r n : nominal rate or the ENR m : number of compounding per year y : number of years

( m ) my

( m)

Furthermore, we have

Join us | Login for Financial Advisors |

SMS us at +65 9782 - 8606

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning http://www.iCompareLoan.com/ +65 9782 8606

PVF =

principal instalment

Finding ENR through manual calculation is an extremely tedious process, so we need the aid of a spreadsheet or financial calculator. In the next section, I am going to make use of Excel.

Excel Function - RATE In Excel and most other spreadsheet software, ENR can be obtained through the RATE function.

RATE will return

rn m

( m)

, ENR is then m*RATE.

RATE (NPer, PMT, PV, FV, Type, Guess): The nominal interest rate per period for an annuity Each of the argument in the parenthesis is defined as NPer (Required): Total number of compounding periods or payment periods PMT (Required): Total payment (principle and interest) payable for that compounding period PV (Required): Present value of the loan FV: Loan amount outstanding after all payments have been made. If this variable is omitted, Excel will assume the default value of 0. Type: The timing of the payment. It can be either 0 or 1. If this variable is omitted, Excel will assume the default value of 0.

Join us | Login for Financial Advisors |

SMS us at +65 9782 - 8606

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning http://www.iCompareLoan.com/ +65 9782 8606

Value 0 1

Explanation Payments are due at the end of the period. (default) Payments are due at the beginning of the period.

Guess: Your guess of what RATE is. If omitted, it is assumed to be 10%. Using RATE Of note is that RATE is independent of the loan amount and instalment in each period. In other words, RATE will be the same for loans with the same number of payment periods and nominal interest rate per annum. To illustrate Loan A Loan Quantum = S$1 million Loan Tenure = 20 years Interest Rate = 10% p.a. Annual Rest with Monthly Repayments Number of Payment Periods = 12 * 20 = 240 Monthly Instalment for the First Year = $ 9,788.30 Loan B Loan Quantum = S$5 million Loan Tenure = 20 years Interest Rate = 10% p.a. Annual Rest with Monthly Repayments Number of Payment Periods = 12 * 20 = 240 Monthly Instalment for the First Year = $ 48,941.51 In Excel, enter the syntax as shown in Table 1: Join us | Login for Financial Advisors | SMS us at +65 9782 - 8606

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning http://www.iCompareLoan.com/ +65 9782 8606

Table 1 Syntax Loan A Loan B = RATE (240, 9788.3, -1000000) = RATE (240, 48941.51, -5000000)

For both loans, the RATE will return 0.83%. The ENR per annum is then 12*0.83% = 10.21%. Next we will learn how to compute the ENR for loans with different rests but all with monthly repayments.

ENR for XX-rest Loans with Monthly Instalment We will rely on the same loan example used in my previous article, which is Loan Quantum = S$1 million Loan Tenure = 20 years Interest Rate = 10% p.a.

Table 2 displays the monthly payment amount for the three rests. Table 2: Monthly Instalment for the First Year

Monthly Payment ($) Daily Rest 9,506.0

Join us | Login for Financial Advisors |

SMS us at +65 9782 - 8606

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning http://www.iCompareLoan.com/ +65 9782 8606

Monthly Rest Annual Rest So to find the ENR, we enter the below syntax. Table 3 Syntax Daily Rest Monthly Rest Annual Rest

9,650.2 9,788.3

=12* RATE (240, 9506.0, -1000000) =12* RATE (240, 9650.2, -1000000) =12* RATE (240, 9788.3, -1000000)

And Excel will yield the following ENR based on monthly rest. Put another way, we just obtained the nominal rate based on monthly rest for the daily-, monthly- and annual-reducing loans. We need to convert the interest to a common basis in order for fair comparison. Table 4 ENR (%) Daily Rest Monthly Rest Annual Rest 9.78 10.00 10.21

Going a step further, we will also like to find out the effective interest rate per annum. Table 5 shows the syntax to enter in Excel. Table 5 Syntax Join us | Login for Financial Advisors | SMS us at +65 9782 - 8606

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning http://www.iCompareLoan.com/ +65 9782 8606

Daily Rest Monthly Rest Annual Rest

= EFFECT (9.78%, 12) = EFFECT (10%, 12) = EFFECT (10.21%, 12)

Finally, we will be able to compare fairly the true cost of borrowing. As expected the cost increases as the rest (frequency of loan calculation) becomes shorter; hence the daily-reducing loan has the lowest effective interest rate.

Table 6 Effective Interest Rate (%) Daily Rest Monthly Rest Annual Rest 10.23 10.47 10.70

For advice on a new home loan. For refinancing advice. Read more articles at PropertyBuyer.com.sg/articles SingaporeHomeLoan.net/blog/ iCompareLoan.com/resources/category/faq/ Join us | Login for Financial Advisors | SMS us at +65 9782 - 8606

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning http://www.iCompareLoan.com/ +65 9782 8606

Join us | Login for Financial Advisors |

SMS us at +65 9782 - 8606

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning http://www.iCompareLoan.com/ +65 9782 8606

About iCompareLoan Mortgage Consultants iCompareLoan Mortgage Consultants is a research focused independent mortgage broker. We emphasize a consultative approach where we match our clients financial situation with the best fit mortgage loan, not simply a cheap loan. We also help property buyers in their buying process by helping them avoid pitfalls from unscrupulous property agents. (We are not property agents, therefore there is no conflict of interests.) We also developed a proprietary home loan reporting tool which provides amongst other things, 23 years SIBOR history as well as 6 years worth of SOR. Our Services: Home Loans Commercial Loans Refinance Home Loan * Mortgage Insurance * Investment Planning * Portfolio Allocation * Retirement Planning * Provided by our associates who are MAS licensed financial advisors.

Why use iCompareLoan Mortgage Consultants? Our service is free as banks pay us a commission upon loan deals completion. Banks in turn save on staffing cost as we are not on their payroll.

Join us | Login for Financial Advisors |

SMS us at +65 9782 - 8606

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning http://www.iCompareLoan.com/ +65 9782 8606

Contact us: Email: loans@PropertyBuyer.com.sg Tel: 6100 0608 SMS: 9782 8606 URL: www.iCompareLoan.com/ www.PropertyBuyer.com.sg/mortgage www.SingaporeHomeLoan.net Join as mortgage consultant: www.iCompareLoan.com/consultant Start a Mortgage Franchise: www.PropertyBuyer.com.sg/mortgage/franchise Check if you qualify to join us: Career at Property Buyer GUEST WRITERS - Do write in at loans@propertybuyer.com.sg (Researchers with the ability to write in the Singapore perspective preferred)

Join us | Login for Financial Advisors |

SMS us at +65 9782 - 8606

Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance