For most people, buying a property in Singapore is the most expensive purchase they’ll make in their lives… and may be one that requires long-term financing.
In fact, in a 2020 report by the Economist Intelligence Unit (EIU), Singapore was listed as being the fourth most expensive city to live in.
That’s a serious consideration when buying property here.
It’s part of why viewing showrooms, talking to property agents about your upcoming purchase, and buying a house may seem simple at first… until you get to the financing part.
Between all the paperwork and options, you may be wondering how to go about doing this and what the best option for you may be.
Well, in this article, we’ll provide information on home loans as well as refinancing and what it means.
You’ll also learn about the difference between an HDB and bank loan, as well as what to expect when approaching a bank about home loans.
What is a home loan?
As a first time homebuyer, you may find it complicated (and even confusing) to figure out what you can afford to buy.
Complicating matters is that what you can afford isn’t dependent on your immediate cash on hand or savings.
After all, you always have the home loan, which is our real concern today.
A home loan or mortgage is a sum of money you borrow to purchase a property to be used as a residence.
The collateral for the loan is actually the property itself, although that’s not all there is to it.
Remember, the amount of money you can borrow depends on several factors. These include your salary, the Loan-to-Value (LTV) Ratio, the Mortgage Servicing Ratio (MSR) and more.
Mortgage Servicing Ratio (MSR)
This is the proportion of your monthly gross income that has to be spent on your mortgage repayment.
It’s one of the first things lenders have to check when considering whether or not to give you a home loan.
The first thing to note here is that it’s only applied for HDB and Executive Condominium (EC) home loans.
The second is that it’s currently capped at 30% of the borrower’s gross monthly income, with the amount including the payments for the loan the borrower’s currently applying for.
The formula for calculating MSR is pretty simple: (Monthly repayment instalments for all property loans / Gross monthly Income) x 100%
Whatever figure you get has to be ≤ 30% x your gross monthly income.
By the way, in case you’re a guarantor for any other property loan, that will be considered as well.
At least 20% of the monthly debt obligation for that loan you’re guaranteeing will be added to the figure for your “monthly repayment instalments for all property loans”.
Total Debt Servicing Ratio (TDSR)
TDSR is the next thing to consider for lenders.
TDSR states that only 60% of a borrower’s gross monthly income can be spent on debt repayments, including the loan being applied for.
These debt repayments include all types of loans you’re taking, including your mortgage.
So, if you’ve other loans (e.g car, credit card, etc.), those will all be counted when totting up the 60% allowance.
The formula for this is simple too: (Borrower's total monthly debt obligations / Borrower's gross monthly income) x 100%
Whatever figure you get has to be ≤ 60% your gross monthly income
Now, bear in mind that if you’re looking to buy a private property, you only need to consider TDSR.
Again, that’s because MSR is only for HDB flat and EC home buyers seeking loans.
Loan-to-Value Ratio (LTV)
Here’s another thing you need to know when applying for home loans in Singapore.
This ratio is actually a limit: it determines the maximum sum of money that property buyers can borrow.
It does that by specifying the maximum loan amount as a portion of the property’s value.
For instance, if the LTV ratio is 50% for a purchase involving a property priced at $1 million, the maximum loan amount you can take out to fund the purchase is $500,000.
For HDB home loans, the current maximum LTV ratio is 90%.
For bank loans, the LTV ratio can go anywhere from 75% to 55%. That’s assuming you don’t have any outstanding housing loans.
The LTV ratio gets significantly lower if you have outstanding housing loans.
Types of Home Loans in Singapore
Now, after deciding on the property you’d like to purchase and considering the factors we just mentioned, you need to decide how to finance your purchase.
There are several types of home loans available in Singapore.
If you’re looking at buying an HDB, you have the option of choosing between an HDB concessionary housing loan and a bank loan.
However, if you’re buying an EC or private property, you only have the option of a bank loan.
HDB Housing Loan
The HDB offers loans to eligible HDB flat buyers.
There are a number of points for eligibility, including Singaporean citizenship and a gross monthly income for the family not larger than $14,000. You can see them all here.
Perhaps the most interesting thing about HDB loans is that they have interest rates that are higher than what most banks offer.
That's because it's pegged at 0.1% above the CPF Ordinary Account interest rate.
Bank Loan
You can also get a loan from a bank to buy property.
The main advantage to this route is that you can potentially take advantage of lower interest rates.
That means you could pay significantly less than if you took up an HDB loan... although this is affected too by the type of bank loan you take.
Anyway, you can only get a bank housing loan if you make a downpayment worth 25% of the property's purchase price.
What's more, 5% of that needs to be in cash.
Hence, if you're trying to buy a $1,000,000 home, you need to make a downpayment of at least $250,000, of which $50,000 needs to be paid in cash.
Now, there are several types of bank loans you may end up with, based on interest rate.
Fixed-Interest Bank Loans
This means that the rate is the same throughout the period you’ve agreed upon with the bank.
For example, if you sign up for a fixed-rate package of 2.5% p.a, that interest rate will be valid for the 3 years you signed up for.
Floating Rate Bank Loans
This is a loan where the rate is variable, being pegged to some sort of index. This means the rate will move up and down with it.
It’s obviously more volatile than a fixed-rate option. But because it’s connected to an index, the rates tend to be more transparent than the previous option.
Anyway, you’re probably wondering why people get this despite the volatility.
Simple. Because there are times when the index to which they're pegged is such that it brings down the interest rate significantly, enough to make it lower than the rate on fixed-interest loans.
If the index is relatively stable too, it may be an attractive option.
What's more, since you can track the index easily, the rate is fairly transparent. An example here would be the floating-rate loans pegged to the Singapore Interbank Offered Rate package.
Fixed Deposit-Linked Rates
These are loans pegged to the bank's fixed deposit interest rates.
They tend to have fairly low interest rates too, but there is a bit of danger to taking them.
That's because the bank can change fixed deposit rates at any time, which means you can still run into a bit of trouble if the bank suddenly decides to bring those rates up.
How to apply for a bank home loan
Getting a bank loan in Singapore is fairly straightforward, provided you meet the eligibility criteria. We already noted them earlier, e.g. the TDSR and the MSR.
Individual lenders may have precise criteria you need to meet, of course, but you'll have to check those, as specifics may vary from bank to bank.
So, that’s the obvious first step: to pick a bank and home loan package.
Once you figure that out, you need to get an In-Principle Approval from the bank you're applying to.
That's basically a letter that gives you an estimate of how much you can potentially borrow from the bank for your home loan.
An IPA helps you in a lot of ways, from narrowing down your property choices to the ones that fit within the loan budget to speeding up the loan disbursal.
The latter is specifically because you can only get an IPA after most of the necessary verification of details has already been done by the lender.
After that, if you do decide to apply for the loan, the bank will only need to verify property documents.
To get the IPA, just tell the bank you're seeking it. They'll give you a list of required documents for you to submit.
The bank will process those and then hand you an IPA later.
Once you have it, you typically have 30 days to pay the Option to Purchase or OTP fee for the property you're buying.
Then you usually get another 21 days to make the downpayment for the purchase as well as get your home loan approved.
How to pick the best home loan for yourself
Still not sure how to choose from among your options for home loans and bank loan packages?
Speak with us! We can connect you to professionals in the industry who can help you look at your overall financial position and plan for something that suits your goals and budget.
Conclusion
From all this, you can see that there are a lot of options for those seeking home loans.
Between HDB loans and bank loans as well as fixed-rate vs floating-rate options, you should be able to find something that meets your needs.
That’s assuming, of course, that you meet lenders’ requirements like MSRs and TDSRs, as we explained earlier.
In any case, don’t be afraid to contact us if you need more clarification of these requirements and the home buying or home loan process.
We’ll be very glad to walk you through it and help you figure out how to make it work!