You've found a house of your dreams and are ready to make it yours.
But first, you need a mortgage to buy your house in Singapore.
If you’re a first-time home owner, don’t make the mortgage for your first home a nightmare. Here are five important home loan factors to consider before you commit to one.
Find out which type of loan to take and how much you can afford?
You’ll find different types of loans offered by the HDB, banks, mortgage brokers, and financial institutions.
The two most common loans that Singaporeans take up are the :
HDB est rate: Rate is pegged to interest rate of CPF Ordinary Account (Fixed rate of 2.6% for the past 2 decades)
Down payment: Pay by cash or CPF
Loan penalty: 7.5% per annum
Max loan: Resale flat (Market valuation or 90% of purchase price, whichever is lower) or New flat (90% of purchase price)
Interest rate: Rate fluctuates depending on the interest rate environment
Down payment: Pay at least 5% in cash
Loan penalty: Dependent on the clause of different banks
Max loan: 75% of purchase price
Read: HDB Loan vs Bank Loan: Which Loan Do You Choose?
Banks will typically offer up to 75% of the property’s value for first-time homeowners. However, the actual maximum loan amount you can take is determined by all the loans you currently have, which is measured by the Total Debt Servicing Ratio (TDSR) or Mortgage Servicing Ratio (MSR).
Mortgage Servicing Ratio (MSR): MSR only applies to buyers of HDBs or executive condominiums. The MSR must be within 30% of your gross monthly income. This means that your monthly mortgage payments cannot exceed this percentage.
Total Debt Servicing Ratio (TDSR): To establish how much you can borrow, the total sum of all your current debts (credit card, car, education loans, etc.), including your proposed home loan, must not exceed 60% of your monthly gross income (salary, rent, bonuses, etc.).
Loan-to-Value Ratio (LTV): Banks allow individuals to borrow a percentage of a property’s purchase price or current market value, whichever is lower. The LTV varies depending on your age, number of existing home loans, and the length of your home loan.
To have an easier time with your home loan, try not to bite off more than you can chew, especially for private property buyers who are subjected to the liberal TDSR. If you commit 60% of your monthly income to debt repayment, you may not have sufficient savings and live pay cheque to pay cheque. It is recommended to keep your debt ratio to 30% or below to have the wiggle room needed in case of unexpected financial situations.
Take note of the length of your home loan
A home mortgage is a long-term commitment, ranging from 10 to 35 years. The longer the length of your home loan, the smaller the monthly repayment you need to make. Younger buyers will typically try to stretch their home loans to 35 years to reduce the amount they pay each month. However, the total amount of interest eventually paid is higher.
Banks will also cap the home loan at 65 years old. If an individual is 45 years old, the maximum mortgage length he will get is up to 20 years.
Choose the right type of interest rates
The type of interest rate – fixed or floating –is another factor to consider when choosing your mortgage loan.
For a HDB loan, its interest rate is fixed at 2.6% for the past two decades and is unlikely to change unless the prevailing CPF Ordinary Account (OA) interest rate changes.
For bank loans, those with fixed interest rates will remain constant during volatile periods but are costlier. Meanwhile, those with floating interest rates are more unpredictable but cheaper.
Both types of interest rates have their pros and cons so choose them wisely. In this situation where the economy is slowly recovering, we recommend a fixed rate home loan in Singapore to allow borrowers to protect themselves against the risk of rising rates.
Read: Should I take a fixed or floating rate package for my home loan in Singapore?
Consider tapping on your CPF for payments
Individuals can pay for their home loans using their CPF Ordinary Accounts (OA) regardless whether they apply for an HDB loan or a bank loan.
The CPF savings can be used for:
Down payment for the property purchase;
Housing loan taken for the property purchase;
Stamp duties and legal fees;
Home Protection Scheme premiums (for HDB flats only); or
Loan taken for the construction of your house or the purchase of vacant land (for private properties only)
They cannot be used for:
Purchase price that is above market valuation for resale properties;
Minimum cash down payment for taking bank loans;
Cost of renovation; and
There are certain conditions to take note when using CPF for your housing payments:
For HDB loans, the down payment can be fully paid with CPF. For bank loans, at least 5% of the down payment must be in cash.
With a bank loan, only up to 120% of the Valuation Limit (VL) of the house can be borrowed, with the remaining amount to be paid in cash
Need to return the CPF monies including the accrued 2.5% interest rate when the house is sold. As a safety net, it is recommended to leave at least six months’ worth of mortgage payments up to $20 000 in your CPF OA in case you get retrenched or cannot work due to injuries/illnesses.
Be aware of penalties and miscellaneous fees
Most home loans offered will have certain subsidies for the legal, valuation, and insurance fees. However, these subsidies have a cap and individuals will have to pay the difference if their fees exceed the cap.
Fixed interest rate home loans also come with lock-in periods. If you don’t stick to it and wish to refinance or prepay the loan early, you’ll have to pay the hefty prepayment penalties and cancellation fees.
There is no one best home loan out there. The type of home loan to get depends on your needs and preferences.