With loan quantums of up to 30 years, real estate investment is probably one of the biggest long-term financial commitments undertaken for most Singaporeans. Hence it is important for buyers to find out your credit standing and assess how much of a mortgage loan you can afford before taking the plunge. It is fiscally prudent to know how much loan you are eligible for so as to ascertain the amount of upfront cash and/or CPF payments to service your mortgage loan.
Cash upfront payments include:-
- Option fee
- Deposit/ Down-payment
- Stamp Duty
- Legal Fee
- Agent Fee
- Other application fees
Subsequent payments include:-
- Housing loan instalments
- Conservancy charges
- Management Fee
- Property Tax
- Mortgage Insurance
- Fire Insurance
- Utilities Bill
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Top 5 things you need to know about Mortgage Loan
Here are 5 important knowledge you need to have about Mortgage Loan.
1. Type of Loan
(HDB Loan vs Bank Loan)
(i) HDB Loan (max 90% loan)
When you take a mortgage or housing loan from HDB, you will enjoy a concessionary interest rate. Current rate as at Aug 2016 is 2.6%.
HDB Loan is only applicable to Singapore Citizens.
This concessionay interest rate is pegged at 0.10% above the prevailing CPF Ordinary Account (OA) interest rate, and may be adjusted in January, April, July and October, in line with CPF interest rate revisions.
Click here to check on your eligibility.
On top of enjoying the concessionary interest rates and subsidised purchase prices for new HDB flats, eligible buyers can also receive further subsidies in the form of CPF Housing Grants of up to $80,000.
Click here to find out how much grant you are eligible.
(ii) Bank loan (max 80% loan)
- There is usually a minimum lock in period of 3 years
- note that interest rates and mortgage packages vary from banks to banks
- Interest rate for loans taken under company’s name compared to individual’s name will approx be 0.5% to 1% higher
- Loan repayment defers, i.e. For building under construction (BUC) development, developers offer progressive payment schemes following the stages of construction. Hence there is an increasing trend in the monthly loan prepayment amount based on how much money the bank has disburse at every construction stage.
2. Types of Mortgage Loans
(Fixed Rate vs Floating Rate)
(i) Fixed Rate mortgage loan provides security to borrowers as the interest rate is static regardless of market conditions.
Because the bank has to guarantee your interest rate regardless of the market situation, you will need to pay a premium. This premium is added onto the existing rate. For example, if the existing rate is 1.4%, and your premium is 0.5%, then you would pay 1.9% interest.
(ii) Floating Rate mortgage loan uses variable interest rate, usually based on either:-
(1) Singapore Interbank Offered Rate (SIBOR)
>> tracks the rate at which local banks lend to each other
(2) Singapore Swap Offer Rate (SOR)
>> based on foreign exchange rates, between the US dollar and Singapore dollar.
(3) Internal Board Rate (IBR)
>> Each bank manages its own Internal Board Rate. There is little transparency in this variable rate as the banks do not need to justify the movements in their board rate. This is different from SIBOR or SOR, which are public and regulated.
There is some correlation between SIBOR and SOR. When SOR rises, SIBOR tends to rise. When SOR falls, SIBOR tends to fall. The difference between them is Volatility.
SOR is sensitive to global market shifts. Because SIBOR is local, it responds more sluggishly to changes outside Singapore. So when the SIBOR rate moves, it does so by a smaller margin than the SOR rate. That makes SOR better suited to risk-takers. When the SOR rate drops, you save more money compared to SIBOR. But when the SOR rate rises, you also lose more.
What does the number of months that are tagged to SIBOR term mean?
(E.g. 3-month SIBOR; 1-month SOR)
Answer: The number indicates how many months the interest is reviewed. If you take the 3-month SIBOR rate, your interest will be adjusted every 3 months to match prevailing rate.
- Go for fixed rate if you have reliable information that market rates are climbing OR if you want to plan your cash flow better. This way, you will know how much you can afford to spend each month
- Go for floating rate if you are a risk taker. Albeit you will get to enjoy the benefits of the current low interest rate environment, there might be a risk of a hike in interest rate which could result in greater cost. It is best for you to keep track of the changes as banks may not inform you of the exact changes, until you ask or check yourself.
- At the end of the day, there’s no one-size fits all mortgage loan package. It’s all about your personal preference and your appetite for risk
3. Refinancing vs Repricing
Refinancing is about switching to a new mortgage loan with lower interest rates either with your existing bank or another lender.
Refinancing at your existing bank is called re-pricing or conversion.
Tips: Review your home loan once every few years to see if you can save money by refinancing. Ask your existing bank for re-pricing options. However, do check with your bankers on the mortgage package you are offered as refinancing or making partial or full prepayments during the lock-in period may result in hefty penalties.
4. Total Debt Servicing Ratio (TDSR) Framework
Effective 29 June 2013
As at June 2013, the Monetary Authority of Singapore (MAS) introduced Total Debt Servicing Ratio (TDSR) framework and the refinement of Loan-to-Value (LTV) rules to cool investment demand in the housing market.
This framework applies to property loans from Singapore and overseas residential/ non-residential properties.
Repayment instalments for all property loans and other debt obligations cannot exceed a TDSR of 60%. This is to encourage prudent borrowing by households. The total monthly debt obligations includes loan like: existing home loan, new home loan that you are applying for, car loan, overdraft facilities, other credit facilities and recurrent debt obligations.All these debt obligations cannot exceed 60% of your total monthly income.
5. Monthly Servicing Ratio (MSR) Framework
Applies specifically for loans taken from banks or HDB to purchase HDB flats, including Executive Condo (EC).
Current MSR is 30%, meaning the monthly mortgage repayment instalment cannot exceed 30% of a borrower’s gross monthly income.
MSR is calculated by dividing a borrower’s monthly mortgage obligations (including debts secured by property) by total gross monthly income.
In the case of joint borrowers, their total monthly mortgage obligations are divided by their total gross monthly income.
However, when calculating the loan repayments it’s worth reading the fine print below.
For bank loan applications:
- a medium-term interest rate (currently between 3 and 4 percent) is used to calculate the loan repayments,
- variable income, such as commission and performance-based bonuses, is taken at 70 percent of its value,
- financial assets must be pledged with the bank for four years, and
- the maximum loan tenure is 25 years (for HDBs) and 30 years (for ECs) assuming the maximum Loan-to-Value ratio amount possible is to be borrowed.
For HDB loans:
- the maximum loan tenure is 25 years, or 65 years minus the buyer’s age (whichever is shorter),
- the loan is calculated based on the HDB concessionary interest rate (prevailing CPF interest rate plus 0.1 percent – currently 2.6 percent), and
- there is a loan ceiling of 90 percent.
If the MSR comes out above 30 percent, the borrower can look into the following suggestions –
(i) extending the loan tenure,
(ii) selling or reducing the repayments on any other properties
(iii) reducing the amount borrowed by increasing the cash down-payment.
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