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Your Guide to Housing Loan in Singapore

Housing Loans. Property Loans. Mortgage Loans. They mean the same thing. They are secured loans, and your property is the collateral in this loan transaction. These loans are normally used to finance the purchase of HDB flats and private residential properties.

In Singapore, financial institutions can lend up to 80% of the value of the property for residential properties. This is referring to the Maximum Loan Quantum. Out of the balance of 20%, 5% must be paid in cash and 15% can be in CPF &/or Cash (provided this is the only property loan). Read more about Maximum Loan Quantum for residential property in Singapore.

Before the loan is approved, the bank will get an indicative valuation from an independent valuer to value your property. This property value is then used to determine your loan amount. If the valuation is lower than the price you paid for the property, you will need to top-up the difference as banks are only financing the lower of the price or valuation.

Financial institutions approve loan amounts based on the combined monthly loan commitments of not more than 60% of monthly income under the Total Debt Service Ratio (TDSR) calculation. The loan commitments include the new property loan instalment payment as well as any other outstanding instalment repayments, such as car loans, and other financial commitments. Read more about TDSR.

Currently, there are loan packages which provide fixed rates of up to a few years while others offer floating rates that are pegged against the market rates like Singapore Interbank Offer Rate (SIBOR) or Swap Offer Rate (SOR), and the bank's board rates.

You are required to pay Stamp Duty for all the properties you purchased in Singapore. Read more about Stamp Duty on Properties in Singapore.

How to Choose a Housing Loan?

There are many housing loan packages in the market and what is best for one person might not necessarily be the best for you. Each package has different features that are suitable for different needs. Banks try to vary their packages here and there to make an “apple to apple” comparison difficult. Consumers also might find comparing different packages daunting.

What are the factors that you should consider in choosing a housing loan? Here are some things you should note before signing on the dotted line for a home loan.

Pre-approval: 

Before you close a deal to buy a property, it is advisable for you to first get pre-approved for a bank loan. 

With the setting up of the Credit Bureau in 2002, banks can now check your repayment history of loans and credit cards taken up with other banks. Were you late in paying instalments? Have you ever been sued? If the answer is yes, banks may not approve your loan application or they might approve a lower loan quantum. This could jeopardise your purchase of a property, and you might even have to forfeit the option money you paid. 

Loan duration: 

A minimum loan duration is five years and the maximum 30 or 35 years, or till you are 65 years old, whichever is lower. 

One way to decide on loan duration is to time the loan duration to match your intended retirement age. So, if you plan to retire by age 60, you should ensure the loan is fully paid up before you reach 60, rather than stretch it till you're 65. 

Floating or fixed: 

If you think interest rates have peaked and are likely to go down, you might want a floating rather than a fixed rate package. 

However, if you're worried about the possibility of banks revising interest rates upwards, you might want a package which fixes the interest rate for the next one to three years instead. Currently, there are no packages that offer fixed rates for the whole loan tenor. 

Flexibility of repayments: 

If you intend to make a lump sum repayment within the next one to three years, you should look for a package that offers you the flexibility to make such repayments without penalty. Some packages impose a penalty fee of up to 1.5 per cent of any lump sum repayment you make. Whereas some packages allow prepayments but impose a minimum loan amount to be maintained within the penalty period.

Transparency of rates: 

If you want to know the exact basis for the interest rates charged on the housing loan, you can consider loans pegged to interest rates that are publicly available, such as the three-month Singapore Inter-bank Offer rate (SIBOR) or Swap Offer Rate (SOR) which move according to market conditions. 

Basically, a home buyer pays an agreed percentage above the variable SOR for a specified period. 

You might want to consider such a package if transparency is a key issue for you and you are of the view that SIBOR or SOR rates are falling rather than rising. 

Penalties: 

Ask if any penalty will be imposed if you make a full redemption of your loan and how long the penalty period is. Currently, there are some housing loan packages with zero penalty period, while most loans typically have a penalty period of one to three years. 

Interest-only: 

If you are a high income earner and in high tax bracket, choosing an interest-only mortgage might make sense. You benefit through savings in income tax as the interest portion of loan instalments for investment properties is tax-deductible. 

This package also works well for short-term investors. By paying back only the interest, investors would benefit from lower cash outflow until they sell the property. As a result, they may be able to invest in two properties instead of one. 

Although pure interest only package is no longer offered by banks in Singapore, there is a similar package offered by one bank that gives the option to pay monthly payment that is lower than the normal instalment. 

Interest-offset: 

If you have substantial cash you might want to consider an interest-offset mortgage instead. This basically links your current account to your home loan. The interest earned in your current account may be at 2/3 of what is charged on your home loan. By offsetting the interest earned on your current account against your home loan interest, you can enjoy more savings - in time and money. 

Every dollar you put into this current account would have same effect as making a partial repayment of your loan, but give you the added flexibility of drawing down the cash in the current account if you need to. Whereas if you do a lump sum prepayment, the cash is 'locked' in the property and you lose liquidity. Thus, an interest offset package enables you to pay a lower effective rate of interest on your housing loan so that a bigger portion of your monthly instalment goes toward reducing the principal. This allows you to pay off your loan sooner and pay less in interest.

Promotions: 

Sometimes, banks might offer special promotional packages. If you engage the services of a mortgage broker, he would be able to provide you updated information on such promotions which could translate to additional interest savings for you. 

Why is it better to apply loan through a Competent and Trustworthy Mortgage Broker? 

In the past, when consumers shopped for home loans, they had to contact each bank individually to gather information. This a tedious process that takes up a lot of time. Over the last 10 years, with increasing awareness and education, there has been an emergence of independent mortgage brokers in Singapore. Home loan shopping and comparison have been made easier. Nowadays, there are even loan comparison websites that allow consumers to make comparison themselves.

Basically, an independent mortgage broker who knows your requirements can help you zoom in on the most attractive home loan packages OR in some cases, help you find the bank that can meet your loan requirement. You will also be kept informed of the latest changes in rates or other terms by banks. You typically do not have to pay for the service of a mortgage broker as banks pay them a fee as they also help banks save on staff costs and resources. 

 

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