According to data released by the Urban Redevelopment Authority (URA) on 15th February 2021, there were 1,609 private residential units sold in January 2021, which is a 32% increase over the previous month. That’s quite a lot of people investing in the Singapore residential market. With the price of Singapore private properties amongst the highest in the world, most of the buyers would need to get a housing or mortgage loan.
Mortgage terminologies can be quite intimidating for first time property buyers. In this article, we will explain some common terms you need to know.
1. SIBOR, Types of Loans
The first thing to note is interest rates. Mortgage loans interest rates pegged to the Singapore Interbank Offer Rate or SIBOR is the fairest and most transparent of all mortgage loan rates. SIBOR is the average interest rate which banks in Singapore lend money to each other and is largely influenced by the prevailing interest rate determined by the United States Federal Reserve. Mortgage loans can be based on the 1-month or 3-month SIBOR. If your loan is based on the 3-month SIBOR, the interest rate will be the 3-month SIBOR plus a margin for the bank, and revised every 3 months.
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, whether SIBOR is up or down. With a fixed rate loan, you’ll know for sure what you will be paying for monthly instalment every month.
On the other hand, floating interest rate changes according to the rise and fall of SIBOR. Floating rates are slightly lower than fixed rates and when the interest rate changes, your monthly installment may change.
Then there is the bridging loan. For those selling your property and buying a new home, you may need this as the cash proceeds from the sale of your existing property may only come in later but you need to pay the downpayment for the new property. Putting it simply, a bridging loan is a short-term loan to pay for the downpayment or for the payment of stamp duty and legal fees.
2. In-Principle Approval
Before committing to a property purchase, be sure to have an In-Principle Approval or IPA from a bank or lender before finalising the purchase. An IPA is an agreement with a bank or lender stating that they are willing to lend you money for your home loan. An IPA is an estimate given by banks or lenders to prospective buyers before finalising any property or to existing property owners before deciding on a refinancing programme. When you apply for an IPA, the bank will evaluate your financial health and credit history.
Banks and lenders will not issue an IPA if they’re not confident that you can handle the repayment of the loan amount that you’re asking for. An IPA is typically valid for 30 to 90 days and it is advisable that you find out what your IPA loan amount is before committing to a property purchase.
3. Lock-In Period
When you apply for a home loan, keep a lookout for the 'lock-in period'. The ‘lock-in period’ defines a period of time, usually 3 to 5 years, in which you cannot switch banks/lenders and/or change the loan terms. If you wish to do so, you will incur a penalty fee which, typically is a small percentage of the outstanding loan amount.
4. Loan Tenure
Loan Tenure is the period of how long you’ll take to fully repay your housing loan. Generally, the younger in age you are, the longer the loan tenure. However, loan tenures for HDB flats and private properties are capped at 30 and 35 years respectively. If your loan tenure is longer than 25 years for HDB flats or 30 years for private properties, the maximum loan amount could be reduced to 55% of the property purchase price.
5. Loan-to-Value (LTV) Ratio
The maximum housing loan borrowers can take depends on their age, loan duration and property type, and whether they have any existing housing loans. Joint borrowers are assessed using an income-weighted average age.
The LTV limit determines the maximum amount an individual can borrow for a housing loan. For HDB loans, the maximum LTV is 90%. For bank loans, the maximum is 75% for the first loan.
6. Mortgage Servicing Ratio (MSR)
Mortgage Servicing Ratio (MSR) refers to the portion of a borrower’s gross monthly income that goes towards repaying all property loans, including the loan you are applying for.
According to the Monetary Authority of Singapore (MAS), MSR is capped at 30% of a borrower's gross monthly income. The MSR only applies to HDB flat and executive condominium purchases, so if you're eyeing private properties, you do not need to be concern with this.
7. Total Debt Servicing Ration (TDSR)
Total Debt Servicing Ratio (TDSR) refers to the portion of a borrower’s gross monthly income that goes towards repaying the monthly debt obligations, such credit card balance, car loan, student loan, personal loan, and any credit term instalment plan you have. Again, as per the Monetary Authority of Singapore (MAS), a borrower's TDSR should be less than or equal to 60%.