According to 2015 research by the Economist Intelligence Unit (EIU), Singapore is one of the most expensive city in the world. Therefore, if you are planning to buy a house in this expensive city, chances are that you will require a home loan. However, since buying a house is not something that we do regularly, you can excuse yourself for not knowing enough about mortgage loans in Singapore.
To help you understand the basics of home loans in Singapore, here is a beginner guide and tips to help you get the best deal on your home loan.
Consider what you can afford
Even with a loan, the amount of money you can borrow depends on many factors, which include:
• Total Debt Servicing Ratio (TDSR)
This is one of the latest government concept introduced in Singapore. Basically, it is a safety net to ensure Singapore citizens do not strain themselves financially by taking too many loans that they cannot afford. The latest ration that was implemented in 2013 imposes a 60 per cent borrowing ceiling of an individual’s monthly income.
This means that the total monthly liabilities should sum up to 60 per cent of the monthly gross income. The liabilities include credit card debt, car loans, home loans, personal loans among other debts.
For example, a person earning an average monthly income of SGD 10,500 in Singapore, he or she can only borrow 60% of that which is equal to $6300. It is then up to the person to decide whether to spend less or utilize the full extent of the TDSR limit.
• Mortgage servicing ratio (MSR)
This is yet another government concept that limits the amount a person’s monthly income can be used to buy Executive condominiums and HDB flats. Similar to TDSR, it helps to prevent Singaporeans from spending more than they can afford to pay for a property.
Currently, this limit is set at 30 per cent of the borrower’s monthly gross income.
For example, an individual earning SGD 30,000 every month can only dedicate 30% which is equal to SGD 9,000 to borrowing any type of property.
This limit applies regardless to whether the home loan is obtained through HDB or through the bank.
Again, a person can decide to either utilize the maximum amount or spend less.
• MSR Exemptions
Mortgage servicing ratio does not apply to refinancing of loans for executive condominiums and HDB flats:
– That are occupied by the owner
– That were purchased before 10th Dec, 2013 for executive condominiums purchased directly from the property developer) and 12nd Jan, 2013 for HDB flats.
• Loan to value (LTV) limits
Having money to put down as deposit also determines the amount of loan you can borrow. Both banks and HDB requires you to put down a certain amount as deposit failure to which you leads to disapproval of your application until you can build up the required capital.
For example, if you are looking obtain a HDB loan, you should be able to make a down payment of not less than 10 per cent of the market value of the property you intending to purchase.
On the other hand, to buy a property with a bank loan, you will need to put down 20 per cent of the property value provided you do not have other outstanding home loans.
However, loan to value limits vary according to the type of property you want to buy as well as the situation.
With that in mind, you still need to be certain that you can actually afford to repay the loan you borrow instead of fully relying on the set limits to determine for you. For example, if you have additional personal commitments, it may not be wise to borrow the maximum that the government calculates as your allowance.
Applying for a Housing and Development Board (HDB) Loan
Housing and Development Board offers housing loans to eligible property buyers at an almost fixed interest rate which is usually 0.1% above the prevailing CPF interest rate. The current HDB interest rate is 2.6% per annum and has not changed for a long time.
To qualify for a HDB loan, at least one of the buyer should be a Singapore citizen and the average monthly gross income should not exceed SGD 10,000. Other documents that you should submit together with the application letter include:
• HDB Loan Eligibility (HLE) Letter
This is the first step in the process of applying for a HDB loan. The letter includes vital information such as the maximum loan you can borrow, the monthly instalments you can afford to pay monthly as well as the maximum repayment period of the loan.
Once a HDB loan is approved, the HLE letter is valid for six months from the date of issue which is enough time to finalize a loan agreement with the housing and Development Board.
• Pay slips from the last 3 months
You can also ask for a letter from your employer clearly stating you job title, the period you have worked there as well as proof of the last 3 months salary.
• CPF contribution history
You are required to submit your CPF contribution history for the last 15 months. This can be obtained from the Central Provident fund board using your SingPass.
In case you are employed without CPF contributions, you will need to provide your passbook or the last 12 months bank statement.
• Credit Bureau report
Sometime, an up to date credit bureau report may also be required when applying for a HDB loan. It can be obtained at the Singapore Credit Bureau.
• If you are self employed
You will need to provide a valid license of trade or business or a valid (Accounting and Corporate Regulatory Authority) ACRA business profile as proof of self employment.
You also need to submit the most recent notice of assessment by IRAS but you can also choose to provide a Certified Annual Statement if Accounts from a certified audit firm.
Apart from the above documents, self employed Singapore citizens should also provide a bank statement for the last 12 months as well as a credit bureau report.
Applying for a bank loan
The advantage of taking a bank loan over a HDB loan is the lower interest rates which translates to reduced monthly installments.
Typically, the interest rate on bank’s home loan has been about 1.7-1.9% since 2008. This means that people with private properties have paid lower monthly installments than HDB borrowers for the last nine years.
However, bank loan rates are determined by the spread as well as the index which is variable and keep on fluctuating from time to time.
How to apply for a home loan
In order to secure a home loan from the bank, you should first get an In-Principal (IPA) as a conditional approval for the loan.
IPA indicates how much you are allowed to borrow and the available loan packages to give a clear understanding of which properties are within your budget.
After signing a particular loan package with the bank, you are given a letter of offer stating all the important information such as the interest rates, loan amount as well as the lock period for the loan.
With the letter of offer, you can exercise your options to purchase the property.
Tips for applying for a home loan
• Do your research
Before committing to, ensure that you get all the relevant information about the home loan so that you can make the correct decision. Ask information about the interest rates, the standard terms and conditions attached to the loan as well as any other costs. Obtaining this information means spending time doing research across banks before taking the plunge.
You can also consider sitting down with bank agent who will break down such matters for you at a fee. This research process will help you identify the most affordable loan for you.
• Do not sign the documents without understanding all the terms
When asked to sign any documents by the bank, first confirm its purpose and read it carefully before signing. You can confirm the unfamiliar terms form the bank or find a lawyer to advise you accordingly.
There you go, hope you can now have a better understanding of how to apply for a mortgage loan in Singapore and what are some of the things that you need to take heed of. Wish you all the best in getting your loan approved!