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Home Loan In Singapore – Factors to Consider

For most, buying a property in Singapore will entail getting a home loan. Unless of course, if you are wealthy or cash-rich.

Buying a property is a huge commitment that is likely to weigh most of us down financially for the next 20 to 30 years. Whether you are a married couple or a single looking to purchase a HDB flat or private property, one of the most important decisions is how to finance your property.

When buying a HDB flat, , applicants have the option of choosing a HDB concessionary loan or a bank loan. In all likelihood, most would be tempted to apply for a HDB concessionary loan (which is currently fixed at 2.60%), or a bank loan where they have an existing relationship out of convenience. (Note: Buyer of private properties are not eligible for a HDB concessionary loan).

Most borrowers will also tend to focus on the interest rate when deciding which home loan to take. For those intending to take a bank loan, most may seem to be offering similar interest rates. However, on closer evaluation, there can be big differences between the home loans and choosing the right one can save you money.

Some of the differences include service fees, refinancing restrictions, early loan redemption, and many others which will be highlighted below.

HDB Concessionary Loan

For many HDB flat applicants, the HDB concessionary loan is their default option, and for good reasons. It is easily approved and if you have sufficient money in your CPF Ordinary Account (OA), you can use them for the downpayment.

HDB also provides up to 90% Loan-To-Value (LTV) financing of the purchase price or valuation of your HDB flat, whichever is lower. You also pay a fixed-rate of 2.6%, which is 0.1% above the CPF OA interest rate of 2.50%, which has remained stable for the last 20 years. This provides certainty on your monthly loan repayments while removing any worries over potential rising interest rates in the future. In other words, it is good for home loan borrowers who are risk-averse.

Bank Loan

There are two main types of bank home loan you can consider – fixed-rate and floating-rate. Fixed-rate loans are usually higher, but they provide certainty over monthly loan repayments and guards against future interest rate increase. However, do take note that banks only offer fixed-rates for the first few years ranging from 1 to 5 years. Subsequently, they will revert to floating-rates.

For floating-rate loans, the interest rates are variable. They are commonly pegged against the 1-, 3-, 6- and 12-month Singapore Interbank Offer Rate (SIBOR) or Swap Offer Rate (SOR). The home loan rate will be set at a spread over SIBOR or SOR. For example, SIBOR + 0.5% or SOR + 0.5%.

What is SIBOR and SOR

SIBOR stands for Singapore Interbank Offered Rate. It is the interest rate that banks in Singapore charge to each other for borrowing or lending money in the interbank market. SIBOR is administered by the Association of Banks in Singapore (ABS) and they are derived randomly from what some banks in Singapore are quoting on a daily basis.

SOR stands for Swap Offer Rate. It is derived from the interest rate differential between the Singapore and U.S. dollar, as well as the foreign exchange rate between the two currencies.

Both SIBOR and SOR generally move in the same direction, although the latter tends to be more volatile as it affected by the movement in the USD/SGD exchange rate. SIBOR usually takes the cue from the movements in SOR. Therefore, SOR home loans will be more attractive if you think that interest rates are going to fall.

Home Loan Quantum

For HDB concessionary loans, borrowers can borrow up to 90% Loan-To-Value (LTV) of the price or value of the property, whichever is lower, provided the lease of the property can cover the youngest buyer to age 95. The balance of 10% can be paid either by cash or CPF OA monies. The maximum loan tenure is 25 years. But if the HDB flat can’t cover the youngest buyer to the age of 95, the LTV will be pro-rated from 90%. In addition, HDB will not grant any home loan for HDB flats with a remaining lease of 20 and less.

As for bank loans, the LTV is 75% of the purchase price or value of the property, whichever is lower, up to a tenure of 30 years. For the balance 25%, 5% must be paid in hard cash and the rest in either cash or CPF OA monies. However, the LTV will drop to 55% for a tenure above 30 years or when it extends past the borrower’s age of 65. For the of balance of 45%, 10% must be paid in cash and the rest in either cash or CPF OA monies (please refer to the infographic below). Further information can be found in “Change In CPF Usage And Housing Loan Rules”.

Loan-to-Value (LTV)

Although the current CPF home loan rate at 2.60% is higher than a bank loan around 2% or less, the cash downpayment for a bank loan can be significantly higher, depending on the price of the property. Hence, this needs to be factored in by borrowers while evaluating their financial positions.

Home Loan Conditions And Penalties

Besides the interest rates, there are other home loan terms and penalties that borrowers should take into account. These include the following:

Lock-in Period – This is the period where the borrower is “locked in” with the bank to enjoy a promotional interest rate. This “locked in” period can be between 1 to 5 years. This feature prevents the borrower from switching to another bank during this period in return for a lower interest rate, which could be 20-30 basis points lower. In the event the borrower decides to redeem his home loan in full during the lock-in period due to the sale of the property for example, the bank usually levies a penalty of 1.5% on the outstanding loan amount. This could easily wipe off any savings gained from the promotional interest rate.

Partial or Full Loan Redemption Penalty – Partial or full loan redemption can happen if the borrower receives a windfall such as a huge year-end bonus or striking lottery for example. As explained above, they will usually attract a penalty charge of about 1.5% on the outstanding loan. Then again, some banks may provide a certain percentage of loan redemption, say up to 20%, without penalty even during the promotional period. Some banks may also require that you to keep a certain minimum loan amount after partial repayment, for example an amount of $200,000. Hence, you should find out such terms and conditions with the bank before committing.

But for HDB loans, there is no penalty for partial redemption. But for full repayment, a registration fee of $38.30 and a conveyancing fee between $23.30 (1-room flat) to $82.35 (Executive flat) are payable. More details can be found here.

Refinancing Fees – Refinancing means switching to another home loan package with another bank after you have completed your lock-in period. This is to take advantage of the lower interests at that time, if deemed beneficial, after taking into account all the related cost for breaking the home loan. Alternatively, you may do a re-pricing which is refinancing your home loan with your existing bank. Again, you need to consider processing fee charged which can range from $200 to $800. Hence, before deciding to refinance or re-price your home loan, work out whether there are any savings left after incurring all the charges.

For borrowers of HDB loans, they can switch to a bank loan in the future to take advantage of the lower interest rates. But once switched, they can’t revert back to a HDB loan.

Subsidy Clawbacks – Banks usually provide some freebies or subsidies to entice borrowers to apply a home loan with them. These may include fire insurance premium, legal and valuation fees. However, they may come with clawbacks and borrowers will need to refund their banks if they wish to refinance their loans within 3 years for example. The amount of clawback can amount to about $2,000.

Interest Rate Reset Date – If a borrower is on a 3-month SIBOR or SOR-pegged floating-rate loan for example, the interest rate will only be reset every 3 months. Should the borrower make a partial or full repayment of the loan or wish to refinance it before the interest rate reset date, a breakage fee of 0.5% (depending on the bank) may be levied on the outstanding loan amount.

Late Repayment Penalty – If you fall behind on your monthly home loan repayment, a penalty will be levied on you. This could either be a fixed percentage on the payment due or a flat fee, say $80. In order not to overlook your monthly home loan installments, it’s prudent to apply for Giro.

Cancellation Fee – Unless you are certain about applying a home loan from a particular bank, don’t commit to it first. Banks may levy a cancellation fee about 1.5% on the amount cancelled.

Loan Structure – Most banks structure their home loan packages on a “step-up” basis. This means the loan rate gets progressively more expensive as time passes. But there are some that reward their clients for loyalty, offering “step-down” loan packages which gets cheaper the longer you stay with them.

Other Property Financing Factors

Besides the various terms and conditions attached to home loans highlighted above, below are two important property financing factors to take note of as they can significantly affect your affordability and the type of property to buy. They are:

  • Debt servicing limits
  • Property stamp duties

Debt Servicing Limits

How much you can borrow to finance your property can be limited by two debt servicing limits imposed by the Monetary Authority of Singapore (MAS). These are:

  • Mortgage Servicing Ratio (MSR)
  • Total Debt Servicing Ratio (TDSR)

Mortgage Servicing Ratio (MSR) – MSR currently sets a 30% limit of the borrower’s gross monthly income that can be used to finance his or her HDB home loan. MSR will also apply to the financing of executive condominiums.

For example, if the borrower’s gross monthly income is $5,000, the monthly loan repayment cannot exceed $1,500 (30% x $5,000).

If your property is jointly purchased with your spouse, then both your income can be taken into account.

Total Debt Servicing Ratio (TDSR) – TDSR takes into account all outstanding loan commitments (e.g. home loan, car loan, study loan, credit card debts, and so on). These loans/debts are capped at 60% of the borrower’s total gross monthly income.

For example, if the borrower’s gross monthly income is $5,000, the monthly total debt repayment cannot exceed $3,000 (60% x $5,000). This will include the borrower’s monthly mortgage. [Note: Those earning variable income such as salesperson, their gross monthly income will be subjected to a 30% hair-cut before TDSR is applied].

Effectively, both the MSR and TDSR seek to ensure financial prudence as well as preventing over-spending by Singaporeans. Indirectly, they also help to curb property speculation by preventing over-leveraging of one’s income.

Property Stamp Duties

Property stamp duties are taxes on dutiable documents on any immovable properties in Singapore. They are computed on the purchase price or value of the property, whichever is the higher amount, stated in the document to be stamped. They are payable to the Inland Revenue Authority (IRAS).

When buying a property, there are two stamp duties to take note of – Buyer’s Stamp Duty (BSD) and Additional Buyer’s Stamp Duty (ABSD).

Buyer’s Stamp Duty (BSD) – When buying a property in Singapore, regardless whether it is a public or private home, buyer’s stamp duty (BSD) is payable. BSD is levied on the purchase price of your property based on the rate shown below. It can add substantially to the overall cost of your property purchase. Hence, it needs to be factored in to determine the overall cost and your affordability.

Buyer’s Stamp Duty (BSD) Rates

Additional Buyer’s Stamp Duty (ABSD) – Additional Buyer’s Stamp Duty (ABSD) is levied on the following:

  • Singapore Citizens (SC) buying their second and subsequent residential properties
  • Singapore Permanent Residents (SPR) buying their first and subsequent residential properties
  • Foreigners (FR) and Entities buying any residential properties (Note: Nationals or Permanent Residents from Switzerland, Norway, United States, Iceland and Liechtenstein are eligible for ABSD remission under Free Trade Agreements (FTAs) and are accorded the same Stamp Duty treatment as Singapore Citizens)

How much ABSD a property buyer will incur will depend on his/her status as indicated below:

Additional Buyer’s Stamp Duty (ABSD) Rates

Conclusion

Now that you are armed with the necessary information, you will be in a better position to shop for a suitable home loan. It’s important to figure out what you truly need and how you can manage the financing not only for the present, but also the future. So, some important considerations will include the following:

  • How big a loan you can afford.
  • What is the length of loan.
  • How much personal savings and CPF funds are available for the downpayment.
  • How much can be set aside for the monthly home loan installments.
  • Will there be future cash injection (e.g. year-end bonuses).
  • Any plans for partial or full loan redemption in the future.

Besides the above, you will also need to take into account other cost of home ownership such as renovation and repair cost, utility bills, maintenance (for condo) or conservation (for HDB) fees, and property tax.

It is also prudent to set aside some savings, in case you need the money for other unexpected home expenses.

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For a list of properties where prices have been discounted by the developers, please refer to: Developer’s Property Sale, Discount And Offer.