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How Do Housing Loans Work in Singapore? – 10 Step Ultimate Mortgage Guide

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Whether you aim to be a home owner in Singapore or a property investor, it’s advantageous to have a thorough understanding of how housing loans work. Understanding them can help you to spend less on your property, ultimately contributing to better resale gains, higher rental yields, and keeping your home affordable.

Here are the 10 key topics to understand:

  1. Main differences between bank and HDB loans
  2. Eligibility for home loans
  3. CPF usage for home loans
  4. Income requirements
  5. Loan To Value (LTV) ratio
  6. Age and loan tenure
  7. Interest offset mortgage
  8. Home fire insurance policy
  9. Home loan fees and charges
  10. Application and approval process

1. Main differences between housing loans from a bank vs HDB:

Singapore banks provide home loans for all of the following:

  • HDB flats
  • Private property
  • Executive Condominiums (ECs)

You have to use a bank loan for private property and for ECs, as HDB does not provide loans for either of those.

In addition, some buyers may not qualify for an HDB loan, even if they’re buying a flat (see Eligibility for home loans below). These buyers will have to use a bank loan.

Read also: HDB vs Bank Loan: Which is better in 2021?

Key factors between HDB and bank loans are:

Maximum available financing

HDB loans allow you to borrow a maximum of 90 per cent of the property price or value, whichever is lower. The minimum down payment is 10 per cent.

Bank loans allow you to borrow a maximum of 75 per cent of the property price or value, whichever is lower. The minimum down payment is 25 per cent. As such, using a bank loan means a bigger initial cash outlay.

Note that these are the maximum amounts only – some situations will reduce the size of your loan (see Loan To Value ratio below).

Different interest rates

HDB loan rates are set at 0.1 per cent above the prevailing CPF interest rate. This is currently 2.6 per cent. The HDB interest rate rarely changes, and has been the same for almost 20 years at this point. As such, many consider it to be a fixed rate (although this is not technically correct, as the HDB rate can change if the CPF rate is ever revised).

Bank home loan interest rates are much more varied consisting of fixed and floating rates. One common factor is that there’s no perpetual fixed rate home loan in Singapore – the interest rates will fluctuate over time. Even loans that have “fixed rates” are usually fixed for a certain period of time only – such as three to five years – before reverting to a floating rate.

2. Home Loan Eligibility

For both banks and HDB, you will be required to show valid income sources. This is often six months of your pay slip or CPF contributions. You can also provide your IRAS Notice of Assessment (NOA), in the event you are taking a home loan as a self-employed or fully commission based individual.

Qualifying for a HDB loan further requires the following:

  • At least one co-borrower must be a Singapore Citizen
  • You can only have taken two HDB loans in your lifetime; if you’ve already had two, you need to use a bank loan.
  • Your combined monthly income cannot exceed $14,000 for families, $21,000 for extended families, or $7,000 for singles.
  • You must not own another property. If you’ve just sold a private property, you need to wait 30 months before you can apply for an HDB loan.
  • You cannot own more than one commercial property, and if you do own one, you must be operating it (e.g., it cannot be a retail space that you rent to someone else). You must also have no other income source besides that business.
  • The remaining lease of the property must last until the youngest buyer is 95 years old.
  • You must meet the Income requirements as described below.

Qualifying for a bank loan is more variable, as each bank may have certain unique requirements. However, all banks, as well as HDB, will run a credit check on borrowers. In general, a credit score of no worse than BB is required – having a good credit score can result in a higher loan amount as well as preferential interest rates.

If you were previously a bankrupt, you will usually have to wait between five to seven years after receiving your official letter of discharge from bankruptcy, before you can apply for a home loan.

If you are a foreigner, note that Singapore banks are also subject to Know Your Customer (KYC) and other compliance issues; they may require additional documentation and proofs.

All banks will also require you to meet the income requirements, age limitations,and Loan To Value ratio as described below.

3. Using CPF for home loans

Your CPF Ordinary Account (CPF OA) can be used for the down payment on your home.

For HDB loans, you can pay up to 10 per cent of the property with your CPF. For bank loans, you must pay the first five per cent of the property price in cash. The next 20 per cent, however, can be paid through CPF.

You can make monthly loan repayments for both HDB loans and bank loans through your CPF.

Stamp duties, such as the Buyers Stamp Duty (BSD) or Additional Buyers Stamp Duty (ABSD), can also be paid from your CPF.

Conveyancing fees can always be paid through CPF if you’re using an HDB loan. For banks loans, it depends on the law firm you use – some law firms can be paid through your CPF, but others can’t. As the amount is typically around $2,500 to $3,000, it’s best to check with the firm before choosing them.

You do not always have to use the law firm picked by the bank – if you can find a cheaper alternative, you can sometimes use a different firm. Mortgage brokers do this as part of their service.

Finally, note that you cannot use your CPF when buying leasehold properties (public or private) with 20 or fewer years remaining.

Do remember that, when you sell your property, the sale proceeds must first go toward refunding any CPF monies used (with accrued interest). If you want to avoid this, you can consider making certain payments – such as your monthly home loan repayments or down payment – in cash instead.

Using your CPF for a second property and beyond

You can still use your CPF monies for a second or subsequent property. However, you must first set aside the Basic Retirement Sum (BRS); any excess amount can then be used to buy property (you’ll need to check with CPF on what the BRS is for your age).

There is also a maximum Withdrawal Limit (WL) for your CPF, after which you’ll have to service the loan in cash.

The WL applies to all property types except BTO flats.

For your first property, the WL is 120 per cent of your property’s Valuation Limit (VL). For your second property, the WL is100 per cent of the VL.

The VL is simply the lower of the property value or price, at the time of purchase.

So if the lower of your property price or value is $350,000 (the VL), you could use up to $420,000 from your CPF. If the home loan is still not repaid by the time you hit this limit, you will have to service the rest of the loan in cash.

4. Income requirements

For many loans in Singapore (not just home loans), the minimum required income is $24,000 per annum for single borrowers, and $36,000 per annum if there’s a co-borrower. For foreigners, some lenders require as much as twice this amount.

HDB loans also have a maximum income ceiling (see Eligibility for home loans above).

Two other important considerations are the Mortgage Servicing Ratio (MSR), and Total Debt Servicing Ratio (TDSR).

Mortgage Servicing Ratio (MSR)

The MSR applies when you’re buying HDB properties. This restricts your monthly home loan repayments to 30 per cent of your gross monthly income.

(Gross monthly income excludes CPF contributions made by your employer).

For example, if you and your co-borrower have a combined income of $5,000 a month, then your MSR limit is $1,500.

If the loan repayment would exceed this amount, you’ll have to extend the loan tenure (up to the usual limits, see Age and loan tenure below) or make a bigger down payment.

Total Debt Servicing Ratio (TDSR)

The TDSR applies to all bank home loans. This restricts your monthly loan repayment – inclusive of all other loans such as car loans and personal loans* – to 60 per cent of your monthly income.

For example, say you and your co-borrower earn $10,000 a month. You already have outstanding debts, toward which you pay $2,000 a month. Your TDSR limit would be ((60% of $10,000) – $2,000) = $4,000.

Because the TDSR takes into account other debts, it’s advisable to begin paying them down before your loan application. Even if you can’t pay them all off, do start consolidating or reducing these debts in the 12 months prior to a home loan application.

This will also help to improve your credit score, and maximise your chances of securing the full LTV. There are other ways apart from salary and debt to take note of if TDSR is affecting your home loan application.

If you’re buying an HDB property with a bank loan, you must meet both the MSR and the TDSR. This is also true for ECs which have not yet met the MOP period.

Note that regardless of your actual loan rate, an interest rate of 3.5 per cent is always used for TDSR calculations.

5. Loan To Value ratio (LTV)

The Loan To Value (LTV) ratio refers to how much you can borrow for your property. An LTV of 75 per cent, for instance, means you can borrow up to 75 per cent of the property price or value, whichever is lower.

The discrepancy between price and valuation is one of the reasons to approach multiple banks only if you are buying a resale property. Different banks will accept different valuations on the same property; so you might prefer a bank that accepts a valuation as close to the actual price as possible.

In general, HDB loans have a maximum LTV of 90 per cent, while bank loans have a maximum LTV of 75 per cent.

The state of the property itself can also reduce the maximum LTV.

Leasehold properties with significant lease decay (i.e., 60 years or less left on a 99-year lease) may have a reduced LTV limit of 55 per cent, or even lower. At present, there is no way to get a bank loan for properties with 30 or fewer years left on the lease.

Lease decay is not an issue for HDB loans – HDB will still allow the usual LTV of 90 per cent, so long as the remaining lease will last until the youngest owner is 95 years old.

However, if the remaining lease would not last until the youngest owner turns 95, the maximum loan amount will be reduced (you will have to consult HDB on the amount they’re willing to lend).

6. Maximum age and loan tenure for a home loan

The minimum age to qualify for a home loan is 21 years (although age requirements to buy an HDB flat still apply), and the maximum age is 65.

The maximum loan tenure is 30 years for HDB properties, and 35 years for private properties. However, note that to get the full LTV (see above), your loan tenure must not exceed 25 years for HDB properties, or 30 years for private properties.

As mentioned in Loan To Value ratio above, your age and loan tenure combine to affect your LTV. For example, if you are 50 years old, and you take a 20-year loan, you would exceed the retirement age of 65; this would result in a lower LTV of 55 per cent.

In the event that you have different borrowers at different ages, a formula called the Income Weighted Average Age (IWAA) will apply. This works as follows:

(Monthly income of borrower A x age of borrower A) + (Monthly income of borrower B x age of borrower B) / combined monthly income of A + B

For example, say borrower A earns $4,000 per month, and is 36 years old.

Borrower B earns $5,500 per month, and is 30 years old.

The IWAA is: ($144,000) + ($165,000) / $9,500 = 33 (rounded up).

This couple would then count as being collectively 33 years old, for the purposes of determining their loan tenure and consequently the LTV.

7. MORTGAGE INTEREST OFFSET ACCOUNT

Apart from locking in rates with a fixed-rate loan, an interest offset mortgage account offers yet another smart way of saving on your interest expense and reducing your loan tenure.

It is essentially a repayment account linked to your mortgage loan for a monthly instalment of your home loan. The money deposited in your offset account for a certain period will work to reduce the interest charged on your mortgage loan, so you can pay off your principal loan amount faster.

For any amount deposited in a mortgage interest offset account, you will earn a higher interest rate that is close to the interest charged on your mortgage loan, thereby offsetting the interest costs. Please note that the interest rate does not apply to your full deposit but to a certain percentage, which varies from bank to bank.

The best part is you can use it as a normal current or savings account with full flexibility in depositing and withdrawing funds as and when required.

This means the so-called emergency funds lying in the banks’ deposit accounts earning as low as 0.025 to 0.5 per cent can be utilized to generate more interest than the traditional savings account.

8. Fire insurance policy (Mortgagee Interest Policy)

What is a mortgagee interest policy/home fire insurance policy?

A home fire insurance or mortgagee interest policy (MIP) is to offer basic insurance coverage for fire, smoke, and water damage that occurs to the interior and exterior of your property in case of strikes, riots, malicious intent, explosion, or fire. Basically, this policy caters to the cost of rehabilitating damaged fixtures, internal structures, and the area built.

Why is fire insurance mandatory for a home loan in Singapore?

A fire insurance is mandatory when taking a mortgage from a bank in Singapore as it is an insurance policy that enables a bank to recover their funds provided for a mortgage when a borrower cannot service his/her loan due to property damage.

The only bank which is an exception is OCBC which do not require a mandatory fire insurance policy to be taken for a private property home loan.

What is not covered in the fire insurance?

Fire insurance does not cover your home contents – for example, renovations, personal belongings, and furniture. It also does not cover personal liability against damages that start from your property and spread to your neighbors, such as fire. The temporary storage of your belongings and the cost of emergency accommodation is also not covered.

What are the premiums payable for a fire insurance policy in Singapore?

Basic fire insurance premiums differ based on banks and the property type, HDB properties are usually the cheapest while landed properties are the most expensive.

Here is an estimation of the annual fire insurance premiums payable:

Mortgage taken from HDB board directly: $1.62 to $8 for the first 5 years (renewable every 5 years)

HDB property with a bank loan: Approx $20 to $40 yearly

Private condo or apartment: Approx $50 to $150 yearly

Landed property: Approx $100 to $800 yearly

The bank cancels the fire insurance policy after you redeem your mortgage loan (which includes selling your property, refinancing and a full repayment) and the coverage and premiums are no longer applicable.

9. Home Loan Fees & Charges

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:

Conveyancing Legal Fees

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.

Conveyancing 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 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.

Read also: Conveyancing Property Lawyer: Can they be cheap & good?

Property Valuation Fees

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.

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.

Lock in periods, prepayment penalties and clawback clauses

Most mortgages come with a lock in period and the usual prepayment penalty is 1.5% of the amount redeemed, if you have to pay off the home loan early.

Some loan packages will waive the prepayment penalties in the event of a sale, or will allow you redeem a certain amount (but not the full loan) without penalty.

Clawback clauses usually apply for any subsidies or rebates provided by the bank when taking up the mortgage with them.

Do be cautious of the home loan lock in period and penalties when accepting the offer letter from any bank to prevent any expensive mistakes in future.

10. Housing loan application and approval process

The first step in the application process is to shortlist the banks with the best interest rates (if you’re using banks and not HDB). These change on a regular basis, so do contact a mortgage broker to help identify the cheapest current loan packages.

The next step is to get In Principle Approval (IPA) from the chosen bank, which is to secure a lender for your property. Once you have an IPA, you’ll know exactly how you can borrow, and that you have a lender ready to disburse the loan.

You’ll need the following documents for a mortgage application:

  • NRIC (or passports, if any borrowers are foreigners)
  • Past 12 months of CPF contributions (get this online, from the CPF website)
  • Past three months’ payslips
  • Latest year Notice of Assessment (NOA) from IRAS
  • Credit card statements, as well as statements detailing other loans and your repayments (such as car loans and education loans).

Your documents and credit score will be used to determine how much the bank is willing to lend you. It will take about two to three days to get approval if there are no issues. However, there may be delays if the bank has further questions.

Once your mortgage application is approved, the bank with present you with the following:

  • The Residential Loan Property Fact Sheet
  • The Letter of Offer
  • A document stating the terms and conditions of the specific loan package
  • The list of subsidies being given to you, as well as the breakdown of administrative fees and charges

Unfortunately, there’s no way to provide you with an exhaustive list of all the possible terms and conditions. If you see something you don’t understand, ask about it – and if you still don’t understand it, you should approach a conveyancing lawyer or a mortgage broker.

At Dollarback Mortgage, we don’t just help you find the cheapest home loan packages – we also provide a proper consultation so you’ll know whether the time is right to refinance, and help you through the extensive paperwork. Contact us so we can help with your home loan.

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