5 important things home buyers should know about home loan
When you’re viewing showrooms and talking to property agents, buying a home in Singapore seems like such a breeze.
… Until you get to the financing part. Between all the financial jargon, the million pros and cons to weigh, and the dreaded paperwork, it feels like you’re back in school cramming for your upcoming Economics exam.
There are so many questions swirling around. Should you opt for an HDB or bank loan? How much is the down payment? And what on earth are LTV, MSR and TDSR?!
In this article, let’s systematically tackle the big meaty home loan issue by breaking it down into 5 practical considerations:
- Who can you get a home loan from?
- What is the interest rate on these home loans?
- How much can you borrow?
- How much will you repay every month?
- After making your decision, how do you proceed?
Who can you get a home loan from in Singapore?
If you’re buying an HDB flat, you can borrow from HDB itself (we’ll call this “HDB loan”) or any bank in Singapore (and we’ll call this “bank loan”). To make your decision, consider the following three factors:
- Consideration #1: Are you eligible? You can only qualify for an HDB loan if your monthly household income is within S$14,000 (for singles, the cap is S$7,000, while for extended families it’s S$21,000). Plus, you must not have owned any private property in the last 30 months. Otherwise, you will have to borrow from a bank.
- Consideration #2: Can you afford the down payment? With an HDB loan, you can borrow up to 90% of your home value, whereas for a bank loan, you can borrow only up to 75%. So if you opt for a bank loan, you need to have at least 25% of the selling price on hand (at least 5% in cash). Tip: Use DBS’ MyHome Planning Tool to work out the down payment for your future home.
- Consideration #3: Do you want to use your CPF savings? If you go the HDB loan route, most of your CPF Ordinary Account (OA) savings will go into the down payment. (There is an option to retain up to S$20,000 in your OA.) After deducting the down payment, HDB will lend the shortfall to you in the form of your HDB loan. If you prefer to leave your savings in CPF, a bank loan allows you to pay up to the full down payment in cash.
If you are young and cash-strapped, the HDB loan is certainly attractive. But some other home buyers choose to borrow from a bank in order to reduce their future home loan instalments and retain more savings in their CPF for retirement.
Which home loan has the best interest rate?
With HDB loans, the interest rate on your mortgage is a standard 2.6% p.a. (based on the prevailing CPF interest rate of 2.5% + 0.1%), which has not changed in years.
Bank loans, on the other hand, have a wide array of different loan packages, and, therefore, different interest rates. But one thing is for sure: bank loans allow you to borrow at lower interest rates than 2.6%. The savings can be quite significant if applied to a large sum! And it may even qualify you to earn higher interest with your savings accounts.
Each bank offers a few home loan packages at any point. These are the three types you’ll find:
- Fixed rate mortgage (for example, 1.80% interest rate for 3 years)
- Floating rate (based on the bank’s fixed deposit interest rate, or a third-party rate like SIBOR)
- Floating board rate (the bank comes up with an interest rate that may change any time)
Floating bank loans usually have lower interest rates than fixed ones, but - as its name suggests - these can fluctuate. For those who want a low but stable interest rate, fixed rate bank loans are a great alternative.
In short, a bank loan can offer lower interest rates than an HDB loan. The main trade-off is you’d have to monitor your interest rate - these usually expire after two or three years. So, from time to time, you may need to reprice your home loan (with the same bank) or refinance (pick another bank for your mortgage).
By the way, even if you opt for an HDB loan at the start, you can refinance to a bank loan at any point to enjoy lower interest rates.
How much can you borrow for your home loan?
The maximum home loan you can borrow depends on three acronyms:
- Loan-to-Value ratio or LTV of your financier
- Your Total Debt Servicing Ratio (TDSR)
- Your Mortgage Servicing Ratio (MSR)
The LTV ratio simply refers to how much of your future home’s price you can borrow. For your first home loan, that’s either 75% with a bank loan or 90% with an HDB loan.
But it does not mean you can get all 75% or 90%, no questions asked! That’s because when you apply for a loan, the financier will also look at your TDSR. TDSR is the portion of your income that goes towards all your debts, such as car loans and education loans. Together with the home loan, TDSR cannot be more than 60% of your gross monthly income.
If you’re buying an HDB flat or executive condominium, there is yet another “R” to consider: MSR. This is the portion of your gross monthly income that goes to home loan repayments, and it cannot exceed 30%.
While all these rules and ratios may seem confusing and restrictive, they are in place to prevent us from biting off more than we can chew, i.e. borrowing above our means.
What Do TDSR and MSR Mean for You?
Let’s say your income is S$3,000 a month.
Here’s how Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) impact how much you can borrow. Note: the MSR is only applicable to HDB/EC.
TDSR: Since TDSR is 60%, you can spend up to S$1,800 a month on repaying loans (of all types).
MSR: Since MSR is 30%, you can spend up to S$900 a month on your HDB/EC housing loan. (This S$900 a month falls under your S$1,800 total loan budget.)
After subtracting S$1,800, the remaining S$1,200 (or 40% of your monthly income) cannot be used for loans.
You’ve shortlisted 2 properties. But can you afford them?
Here’s how your situation could be different if you had other loans
How much to repay every month? Cash or CPF?
Oh yes, to make sense of the above borrowing limits, you would need to know how much your monthly loan repayments are – this is easily done with the help of a home loan calculator. The longer your loan tenure, the smaller and more manageable the loan repayments will be.
Singaporeans have the option of using their CPF Ordinary Account savings to repay home loan instalments - so should you repay with CPF or cash?
Paying with CPF is certainly attractive if you need the cashflow for your day-to-day expenses and investments. But you would give up the high interest rate on your CPF monies. When you eventually sell your home, you also need to return the CPF OA savings you used to pay for it, along with accrued interest.
On the other hand, repaying your loan with cash allows you to maximise that 2.5% interest rate on your CPF OA savings. Not only that, you can pocket the proceeds from the future sale - there is no need to top up your CPF.
On the subject of repayments, it is also possible to repay your home loan partially or in full - for example, if you have an unexpected windfall and would like to put it towards your mortgage. You may need to pay a small penalty fee when doing so, but it also saves you interest in the long run.
After deciding on your home loan, what’s next?
There’s been so much to digest and think about that you might want to take a few days to think your home loan decision through.
Once that’s done and you have made up your mind to proceed with a bank loan, the next step is to obtain In-Principle Approval (IPA) of your housing loan. This is a document from the bank stating how much they are willing to lend you, taking into account your TDSR, MSR, income and credit score.
You should secure your IPA before paying the option fee for your home. That’s because if you find out that you cannot borrow enough to pay for the property, you won’t be able to get a refund of the option fee. In fact, some property agents require you to come with an IPA before they can proceed with the transaction.
The process for getting an IPA varies from bank to bank, but for DBS, it’s quick and simple. It takes just 10 minutes to fill in and submit your DBS’ In-Principle Approval application.
You can upload the supporting documents into the portal in your own time after submitting the application. Once your IPA application is complete, you will get your IPA in just 1 to 2 days - meaning you can finally buy your dream home for real.