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Picking the Right Mortgage Loan Can Save You Money! Here Are 4 Easy Tips

Buying a home in Singapore is a major milestone in one’s life and picking the right home loan is paramount.

In Singapore, if you buy an HDB flat, you will have to live in it for at least 5 years before you are able to sell and for private properties, unless you are willing to pay the Additional Buyer’s Stamp Duty (ABSD), chances are that you will have to own it for 4 years or more.

Therefore you are likely to be paying the mortgage loan for a substantial period of time.

In today’s article, we look at some tips on picking the best mortgage loan for your property.

1. Property type

If you are buying an HDB flat, you can take a loan from the HDB or banks and financial institutions (FI), but if you are buying a condo or private property, you can only borrow from the banks or FIs.

So what is the difference between an HDB loan and a loan from the banks or FI?

To qualify for an HDB loan, your monthly household income must not exceed $14,000.

The plus point of an HDB loan is that you can borrow up to 85% of the flat’s value which means you pay a lesser down payment. This is helpful for those just starting out in the workforce with less cash and CPF funds.

If you take a mortgage loan from a bank or FI, you can only borrow up to 75% of the flat’s value and that would mean a bigger down payment.

So if you have cash on hand or sufficient CPF funds, taking a smaller mortgage loan amount would mean saving on interest payments and a shorter repayment period.

For those who take an HDB mortgage loan, you can subsequently refinance with a bank loan but if you start with a bank loan, you cannot refinance with an HDB loan.

2. Interest rate

The interest rate for HDB mortgage loans is 2.6% p.a., which is 0.1% above the current CPF interest rate of 2.5%.

However, bank loans’ interest rates vary, depending on the package you choose, and it is highly likely that it is lower than the 2.6% charged by HDB.

So, if you can afford the higher down payment, you may want to consider taking a bank loan at a lower interest rate and pay less for the monthly instalment.

Banks provide different packages such as fixed-rate and floating-rate and the interest rate for each are different.

Fixed-rate packages are as the name suggests, the interest rate is fixed. This package usually has a higher interest rate and would be for those who want stability and pay a consistent monthly instalment.

Floating rates packages’ interest rate fluctuates but is normally lower than the fixed rate. The rate changes accordingly and you could pay less monthly if the interest rate is down and pay more if the interest rate goes up.

Before deciding on the package that best suits your situation, it will be wise to talk to the different banks and choose the package that is ideal for you.

Who knows, you could manage to get a good deal plus some freebies! 😉

3. LTV, TDSR and MSR

LTV or Loan-to-Value refers to how much you can borrow.

As stated above, you are allowed to borrow up to 75% of your home’s value from a bank loan or 85% from HDB. That is the general rule but is subject to the Total Debt Servicing Ratio (TDSR).

TDSR in layman’s terms means the portion of your monthly income that is used to pay your debts, such as credit card bills, car loans, personal loans and education loans etc.

The TDSR, including the mortgage loan that you are applying for, cannot exceed 55% of your gross monthly income.

Mortgage Servicing Ratio (MSR) only affects those buying an HDB flat (BTO and resale) or executive condominium (EC) bought directly from the developer and does not affect those on the open market.

Under the MSR, your monthly mortgage payment cannot be more than 30% of your gross monthly income, whether you are taking an HDB loan or a mortgage loan from the banks. So if your gross monthly income is $6,000, your monthly instalment cannot be more than $1,800.

4. Cash or CPF?

If you have been in the workforce for a period of time, you would have saved up some money and accumulated quite a tidy sum in your CPF account.

Is it better to pay cash or use CPF funds? 🤔

CPF funds are meant for your retirement and money in the ordinary account (OA) earns an interest of 2.5% p.a. Using cash would mean leaving your CPF funds untouched and eventually result in having a tidy sum for retirement.

If you use CPF funds to pay for housing, not only will you lose out on earning the high interest, you will eventually have to return the amount used when you sell the property plus the accrued interest.

For those facing cash flow difficulty, there is really no alternative but to use CPF funds.

In summary, everyone’s situation is different and picking the best loan is ultimately based on your current financial standing and your lifestyle.

Those who prefer low risk and stability would choose a fixed package that comes with a slightly higher interest rate but the monthly instalment does not change and you can budget your monthly expenses better. Floating rate packages save you some money but you have to monitor the interest-rate climate consistently and be prepared to pay more when interest rates go up.

The important thing is to be comfortable with your selected package and not over-stretch your finances.


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