What you should know about home loans
While the recent changes to the Additional Buyer’s Stamp Duty (ABSD) and Loan-to-Value (LTV) limits may or may not affect you, it is almost without a doubt that many factors, including the type of home loan package to apply for, will come into play when you are buying a home.
Here are 8 things you should consider about home loans to help you decide.
1. Interest rates
The interest rate for a Housing Development Board (HDB) loan is pegged at 0.10% above the prevailing Central Provident Fund (CPF) Ordinary Account (OA) interest rate. This is 2.60% p.a. and has been steadily maintained at such for over a decade.
In comparison, at the time of writing, taking up a bank loan which is pegged to either a fixed deposit interest rate (such as the POSB HDB Loan) or market benchmark rate such as SIBOR (approximately 1.52% p.a^. at the time of writing) may translate into savings in the long run – and you will be able to use these savings to further grow your wealth!
^ Source: Sibor Singapore
2. Eligibility criteria
Before deciding on which loan to get, you’ll need to first be eligible for them. For the HDB loan, you’ll need to be a Singapore citizen, earn a monthly salary of not more than S$6,000 (for singles) OR have a gross monthly household income of not more than $12,000 (for families).
If you do not meet HDB’s requirements, you’ll need to consider alternatives, such as a bank loan < https://www.dbs.com.sg/personal/loans/home-loans/default.page>. Acceptance criteria includes having a good credit score. To commence the process, you may provide your personal and loan details online.
3. Structuring your loan
Bank loans often come with attractive benefits ranging from free conversions of your home loan interest rate or legal and valuation fee subsidies to flexible lock-in periods. With these options, financially-savvy homeowners like yourself can pick the loan option that best suits your risk tolerance, essentially allowing you to handle your money with greater flexibility with close to no out-of-pocket costs.
4. Understand the difference between fixed rate and floating rate loans
Most bank loans involve either: a) fixed OR b) floating (or variable) interest rates.
Fixed rate loans are usually priced at a premium in exchange for holding rates unchanged over a certain period, after which, a floating rate will be applied. Conversely, the rates for floating packages are usually lower and could adjust according to market changes.
You should weigh the pros and cons between opting for a lower all-in floating rate that could possibly fluctuate, or paying a higher fixed rate in exchange for a peace of mind.
Be sure to pick a loan plan that not only offers optimum interest rates, but also suits your risk tolerance and financial planning goals.
5. Find out the repricing/refinancing options available to you
Perhaps you are planning to reprice or refinance your home loan. Be sure to check with your bank if there are any applicable fees or charges (e.g. repricing fees, clawback periods, legal fees, lock-in clauses and cancellation fees) before doing so.
Also, some banks do not offer repricing or refinancing when your loan amount falls below $100,000, so don’t forget to ask if there is a minimum loan amount requirement as well!
6. Know what the Total Debt Servicing Ratio (TDSR) means for you
As part of the cooling measures for the property market, the Government of Singapore introduced the Total Debt Servicing Ratio (TDSR) in 2013, which limits the total sum of your outstanding debts from loans (not just housing, but also student, personal, car etc) to less than 60% of your gross monthly income.
That’s not all. If you’re looking to purchase a resale HDB flat, or an executive condominium, there’s also the Mortgage Servicing Ratio (MSR) to consider – a measure that limits loan repayments to 30% of a borrower’s gross monthly income. Consequently, taking out a housing loan (whether it’s with a bank or HDB) will require you to meet both TDSR and MSR requirements for your application to be approved.
7. What is the loan duration that you’ll be committing to?
Longer loan tenures generally mean smaller monthly repayments, and vice versa. The period of repayment (usually up to a maximum of 30 years for most bank loans) varies according to the amount borrowed and the down payment you make.
If you intend to make early repayments to shorten your loan tenure in the future, check with your bank for any conditions involved. You may be charged a penalty fee for early repayment while you are still within a commitment period; otherwise, expect to repay a minimum sum as well.
8. Understanding the LTV limit, and how it affects borrowing
The LTV limit refers to the loan amount you could borrow in relation to its property purchase price or market value (whichever lower). The maximum LTV limit differs depending on factors such as your property type, the number of existing housing loans you currently have and your age etc.
Monetary Authority of Singapore (MAS) recently announced a 5% reduction in the LTV limit for all housing loans granted by financial institutions as part of the new cooling measures. For first-time HDB home owners, they are now only able to borrow up to 75%. This means that they might need more time to save for the higher cash and/or CPF funds outlay for their down payment.
However, when you obtain a bank loan, you may choose to utilise more of your cash for the down payment and allow your CPF OA savings to grow at 2.50% p.a., as compared to a HDB Concessionary Loan whereby you are required to utilise all your CPF OA savings and leave up to S$20,000 untouched.
It is important to note that there is no change to the LTV limits for refinancing, which still remains at 80% (assuming you have no existing housing loan). This means that it could still be worthwhile to make the switch, when you consider the interest savings that you could enjoy with the lower interest rates offered by the bank compared to a HDB Loan.
Check out this Home Loan Interest Savings Calculator to get a quick calculation of the savings you could enjoy.