Buying your first home and securing your mortgage loan can be pretty confusing when there are more than 21 banks offering close to 145 options for housing loans in Singapore. Not only that but having to understand requirements like Total Debt Servicing Ratio (TDSR) and Mortgage Servicing ratio (MSR) just adds more misery. But all is not doom and gloom as we highlight some of the key points to take note when buying your first property and taking up a mortgage loan in Singapore.
There is a systematic categorization of property in Singapore that one needs to be aware of before securing a loan for their respective property type. Private housing and HDB flats are two prominent types of property in Singapore that both locals and foreigners can consider investing in. Based on the type of property you are purchasing, your home loan application process and the mortgage itself would vary.
A HDB flat is subsidized public housing that is provided and managed by the Housing and Development Board (HDB) in Singapore. The government offers HDB housing on a temporary leasehold basis for 99 years only. One of the key requirements of securing a mortgage for a HDB unit would be to fulfill the Mortgage Servicing Ratio (MSR) which is explained in further detail below.
Private housing on the other hand is developed by private developers and follows a different set of rules and regulations depending on the lease classification of the property. Private properties have leases ranging from 99 years, 999 years as well as freehold. For a private property excluding non-privatized Executive Condominiums (ECs), only the Total Debt Servicing Ratio (TDSR) needs to be satisfied before a mortgage loan can be granted.
Navigating the home loan market in Singapore can be overwhelming and confusing. Indicated below is a general overview of the different types of interest rate packages offered for a mortgage in Singapore. Deciding on how to choose a home loan interest rate in Singapore is also a key factor when finalising your mortgage:
The interest rates for this type of mortgage loan is fixed for a certain period of time ranging from 1-5 years. The repayment is in the form of a fixed amount of monthly installments, which is not affected by the fluctuations in domestic or global interest rates. Since fixed rate packages give you the highest level of security in your interest rates and monthly installments, you will usually find them having the highest interest rates offered by the bank.
A Singapore Overnight Rate Average (SORA) home loan is relatively new but is expected to replace SIBOR rates in the next 3 years. Simply put, SORA interest rates are highly transparent and less volatile as they are pegged closely to the SGD and are loosely impacted by global interest rate movements. The most common home loan interest rate type is the 3 month compounded SORA rate which is calculated as an average of the previous 3 months SORA rate based on the SORA index. SORA rates and the index is published on the ABS website and updated each business day.
Best banks for SORA Rate Home Loans: OCBC for now
The interest rates for these packages are pegged to the Singapore Interbank Borrowing Offer Rate (SIBOR). SIBOR rates have a tenure ranging from 1, 3, 6 and 12 months. The tenure reflects how often the rates are refreshed. A 3 month SIBOR would change every 3 months and a 1 month SIBOR would change every month. SIBOR rates have a strong correlation to the US Federal Reserve rates and therefore have the greatest amount of transparency linked to them. SIBOR rates are widely available on websites such as the Association of Banks in Singapore.
Best banks for SIBOR Home Loans: Maybank, HSBC, Standard Chartered
HDB housing loans are offered by the Housing & Development Board in Singapore and are only applicable for HDB properties. HDB loans are easier on the pocket since they come with a lower down payment obligation of 10% versus 25% for a home loan from a bank. HDB loan interest rates are at a concessionary rate of 0.10% above the CPF Ordinary Account (OA) rate which comes up to 2.60% and is also relatively stable throughout your entire loan tenure.
This home loan package is pegged to the bank’s 8/9/12/14/15/18/24/36/48 months fixed deposit interest rates. It is a unique package first introduced by DBS, will all major banks following suit. Traditionally, these packages have proved less volatile than the SIBOR packages and cheaper than fixed rate packages. However, it is still a floating package nonetheless so your home loan rates could change at any time.
Best banks for FDR / FHR Home Loans: DBS, Standard Chartered
Board rate packages are the most risky packages as they have no transparency and are controlled entirely by the bank. We would usually not recommend these packages unless there are no better options available in the market.
Best banks for Board Rate Home Loans: UOB, OCBC
Mortgage servicing ratio (MSR) is an important consideration for banks, when they are deciding your eligibility for securing a loan for a new HDB or a non-privatized Executive Condominium purchase. It is essentially the calculation of the part of the borrower’s gross monthly income that would go into repaying the property loans that the borrower has to his name, including the one he is applying for.
Current regulatory rules say that the MSR cannot be more than 30% of a borrower’s gross monthly income. The formula for calculating the MSR of a borrower is:
(Monthly repayment installments for all property loans / Gross monthly Income) x 100% ≤ 30%
It is important to remember that MSR applies only to a resale HDB purchase, BTO housing loans and the purchase of an executive condominium bought directly from a developer.
Total debt servicing ratio (TDSR) is a different ball game altogether. It refers to the part of a borrower’s gross monthly income that goes into repaying the monthly debt obligations, including the loan being applied for. It is not restricted to HDB flat or ECs, but is applicable for all mortgage loans in Singapore.
While MSR only concerns itself with your housing loans, TDSR takes into consideration any and all loans you may have taken, including credit cards, car loan, education loan, personal loan etc. The cap for TDSR is set at less than or equal to 60% of your total gross monthly income.
The formula for calculating the TDSR of a borrower is:
(Monthly repayment installments for all debt obligations / Gross monthly Income) x 100% ≤ 60%
When applying for a home loan, there are certain other expenses that nobody prepares you for, but we will. Below listed are the different kinds of fees you might have to pay during the process of being granted a home loan:
Engaging a conveyancing lawyer is mandatory for any home owners, applying for a loan. Legal services are provided for conveyancing, mortgage documentation, IRAS stamping fees, CPF fees and mortgage stamping fees. Legal fees and thus a conveyancing law firm is required for all sale and purchases of a property, refinancing your property, decoupling / part purchase and application of a term / equity loan. Different services are priced differently on an approximate scale of $1,500-3,000. Choose your conveyancing lawyer wisely and do your research beforehand and do note that many property agents receive referral fees from law firms if you engage the services of their recommended law firms. These referral fees are included within the cost of your legal fees and you may end up paying higher than what is ordinarily required.
Property valuation reports are required by all Singapore banks when a mortgage loan is being granted to a borrower. The usual steps involve an indicative valuation during your home loan application and subsequently a formal valuation once your loan has been approved and accepted. Valuation fees are dependent on the type of property, market value of your property and the bank which you have taken your mortgage from. As a general gauge, valuation fees range anywhere from $50 up to $700 and are a one time charge only when buying your property.
Fire insurance fees are essentially the premiums payable on fire insurance taken out by either the bank or HDB and are usually from $80 up to $300 for more expensive properties. If your mortgage is provided by a bank, the bank will have an appointed fire insurance provider to issue the policy for your property and the annual premiums will then be payable to the insurance provider. This is mandatory for almost all home loans issued by banks in Singapore and it protects the interest of the homeowner as well as the bank. If you are taking a HDB home loan, it comes with a compulsory HDB fire insurance attached to the loan. The important thing to note is that the fire insurance coverage provided by the bank and HDB is restricted to your building, but NOT the contents of your home.
Now that you are equipped with all the information, here is a step-by-step guide to follow before actually filing your loan application:
Step 1: Decide on the property type you would like to purchase. Look up the pros and cons of each of them and make an informed decision. Ensure the market value and asking price makes sense.
Step 2: Based on the property type you want, pick the lowest home loan rates that suits your needs. Compare interest rate packages from at least 5 banks and request for any special terms and features they can offer
Step 3: Once you have picked a package from a preferred bank, ask for an in principle approval so that you are assured that you can secure the maximum loan amount for your purchase
Step 4: All that is left to do is to then put down your Option fee and apply for your official letter of offer for your home loan from the bank.
Taking your first home mortgage loan can be a daunting process. So much information out there can be confusing. We hope that after reading this piece, you are better informed about the nuances of securing your first home loan. Find out the latest rates for a new HDB bank loan or a new private property loan in Singapore.
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