27 Oct 2018

5-minutes read before getting a home loan

There are many factors to consider when buying a home, especially with the recently announced revisions to the Additional Buyer’s Stamp Duty (ABSD) and Loan-to-Value (LTV) limits.

If you need a loan, which home loan package should you apply for? Here is a quick guide to help you decide.

INTEREST RATES

The interest rate for an HDB loan is pegged at 0.10% above the prevailing 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 or market benchmark rate such as SIBOR (approximately 1.52% p.a^. at the time of writing) could translate into savings in the long run – and you will be able to use these savings to further grow your wealth!

^ Source: Sibor Singapore

ELIGIBILITY CRITERIA

Before deciding on which loan to get, you’ll need to first be eligible for them. For 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 S$12,000 (for families).

If you do not meet HDB’s requirements, you’ll need to consider alternatives, such as a bank loan. Acceptance criteria includes having a good credit score. To kick start the process, you may provide your personal and loan details online.

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.

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 would have to 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.

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 S$100,000, so don’t forget to ask if there is a minimum loan amount requirement as well!

KNOW WHAT THE TOTAL DEBT SERVICING RATIO (TDSR) MEANS FOR YOU

As a part of cooling measures for the property market, the Government 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.

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.

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; expect to repay a minimum sum as well.

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.

MAS recently announced a 5% reduction in the LTV limit for all housing loans granted by financial institutions as a 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 take up a bank loan, you can choose to utilize 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 utilize all your CPF OA savings.

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, and read more about buying a home before making your decision!

Find out what buying a home means to your financial health

Purchasing your first home; your first big-ticket item? Speak to our NAV crew today for a free financial health check and how you can better plan your finances.

Let's meet over coffee