Buying a property is a long term commitment.
Unless you have several million in your bank account, you definitely would need to take a mortgage loan.
In today’s article, we take a look at 5 important factors when choosing the right mortgage loan.
Who to borrow from
If you are buying an HDB flat, be it a BTO or resale, you can choose to borrow from either HDB or any bank in Singapore.
To be eligible for an HDB loan, you must meet the household income ceiling of $14,000, $21,000 if you are buying under the extended families scheme, and $7,000 if you are buying under the singles scheme.
Another criteria is that you must not have owned any private property in the last 30 months.
For HDB loans, you can borrow up to 90% of the value of the property value.
For bank loans, you can only borrow up to 75% of the property’s value.
That would mean a 25% downpayment, of which 5% must be in cash and the remaining can be in cash or CPF monies.
Another important factor is the usage of CPF funds.
When you take an HDB mortgage loan, your CPF Ordinary Account (OA) funds will be almost wiped out entirely, but you have the option to retain up to $20,000. After deducting from your CPF OA and the downpayment, the outstanding amount will be considered as the HDB loan amount.
For bank loans, if you decide not to use any CPF funds, you can pay for the full down payment amount in cash. That way, your CPF funds will continue to enjoy the CPF savings interest rate of 2.5% p.a.
If you are buying a private property or an executive condominium, you do not have the option to take an HDB loan.
With HDB loans, the interest rate you are paying for your housing loan is 2.6% p.a., which is based on the prevailing CPF interest rate of 2.5% + 0.1%). It is worthwhile to know that this rate has remained unchanged since 1999.
If you borrow from a bank, you can choose between their fixed or floating rate packages.
There are two types of loans that you can opt for when taking a home loan: Fixed Interest Rates or Floating Interest Rates.
A fixed interest rate is usually priced at a premium as the rate will remain unchanged over a specific period. With a fixed-rate loan, you’ll know for sure what you will be paying for monthly instalments every month.
On the other hand, floating interest rate changes according to the benchmark rates. Floating rates are slightly lower than fixed rates and when the interest rate changes, your monthly instalment may change.
Some bank’s fixed interest rate starts from as low 1.15% and floating interest rates starts from 0.92%. These rates are much lower than the HDB’s prevailing rate of 2.6%. The savings can be quite significant if the loan amount is substantial.
How long is the borrowing period
The maximum loan term for an HDB housing loan is 25 years whereas bank loans are typically up to age 65.
So if you are 30 years old, your loan term can be 35 years if you want.
But bear in mind, the longer the loan term, the higher amount of interest you have to pay. However, your monthly instalment will be a smaller amount.
You should look at your financial standing and see decide if a longer loan term works for you or smaller monthly instalment payment is better for your situation.
How much to borrow
The maximum housing loan borrowers can take depends on their age, loan duration and property type, and whether they have existing housing loans. Joint borrowers are assessed using an income-weighted average age.
In 2013, the Monetary Authority of Singapore (MAS) introduced a Total Debt Servicing Ratio (TDSR) framework for all property loans granted by banks and financial institutions and also refine the Loan-to-Value (LTV) limits on housing loans.
The loan-to-value (LTV) limit determines the maximum amount an individual can borrow, which is usually a percentage of the property’s value.
For HDB housing loans, the LTV is up to 90% of the purchase price of BTO flats and lower of either the resale price or market value for resale flats.
For a bank loan, the LTV is limited to up to 75% of the purchase price.
Total Debt Servicing Ratio (TDSR) refers to the portion of a borrower’s gross monthly income that goes towards repaying the monthly debt obligations, including the loan being applied for.
A borrower's TDSR should be less than or equal to 60% of your monthly income. This ensures that borrowers are not over-leveraged for property purchases.
Fees & penalty charges
For HDB housing loans, you only need to pay the registration fee of $38.30 and conveyancing fees of between $23.50 to $82.35, depending on the flat type, for early redemption of the loan amount.
For bank loans, there is a lock-in period and if you choose to redeem the amount during this period, there is a penalty of between .75% to 1.75%. Each bank or lender charge different rates and it is best to check with them before committing to a package.
The above are some tips on how to choose a mortgage loan. However, if you are still unsure, it is best to speak with the banks/lenders directly before making a decision.
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