Singapore’s home-ownership rate is over 90%, a relatively high number considering the expensive property prices and scarcity of land in Singapore. Most people must take up a mortgage loan to fund their property, and in recent years applying for such a loan has become increasingly difficult due to more tightening measures that were introduced by the government to prevent over-borrowing.
Borrowers must now be more financially savvy before putting down a deposit for their dream home or signing up for a home loan. However, it can be really confusing when it comes to choosing a home loan. There is no so-called “best” home loan available, as it depends largely on your needs, preferences and of course, eligibility.
A word of caution: Do not attempt to submit your home loan applications to multiple banks before you have done your research. Each time you apply for a home loan, you are granting a financial institution permission to retrieve your credit report and if the credit bureau receives too many enquiries, it may alert the bureau that you are trying to take on more debt, consequently lowering your credit score.
In this article, we will highlight 5 important factors that borrowers must consider before shortlisting a property loan that is most ideal for your needs, or if you are looking to refinance your existing mortgage loan.
- Mortgage Loan Interest Rates
One of the most important factors to consider when choosing a home loan is the interest rate. Different financial institutions offer different rates with different conditions, hence, before settling with the first home loan package that comes your way, make sure to shop around and research the best rate that is most suitable for your needs. To speed things up, leverage online resources to suss out mortgage rates from different banks in Singapore. Such information is often published on sites like Smart Towkay where a comprehensive list of rates and conditions are made available to mortgage loan borrowers for easy reference.
- Fixed vs Floating Rate
The mortgage loan interest rates in Singapore usually offer two options: fixed rate and floating rate. To choose between the two, borrowers must take a longer-term perspective instead of choosing the lowest interest rate available at that moment.
Fixed rate mortgage loans refers to the interest rate that remains the same over a fixed period of the home loan. It allows the borrowers to plan their finances more accurately because the monthly loan amount for repayment is the same. However, the fixed rates are generally higher than floating rates home loans even though there is no guarantee that signing up for the latter is better off, it all depends on the volatility of the market.
To further explain, let’s look at what is floating rate. The floating rate (or variable rate) is usually pegged to a benchmark rate, typically the Singapore Interbank Offered Rate (SIBOR) or the Swap Offer Rate (SOR). These rates are affected by US interest rates and Singapore banking system liquidity. When SIBOR and SOR go up, the floating rates will go up and vice versa. So, for borrowers who have done their research and believe that interest rate will remain low for a long period, then a floating rate home loan may just be the ideal choice. Even so, take note that some floating rate home loans may offer lower rates at the start but because they are more volatile, the rates may fluctuate quickly and become more costly than fixed rate home loans over a prolonged period.
Recently, the US Federal Reserves (Fed) has announced that Fed interest rates will be held at “near zero” until the end of 2022 to stimulate the badly affected Covid-19-hit US economy. As Fed interest rates and interest rates in Singapore are closely correlated, the floating interest rates for home loans, especially those pegged to SIBOR, will also remain relatively low until the end of 2022. As banks’ floating rates are at the lowest, this provides opportunity for home owners to secure favourable interest rates for refinancing. While some Singaporeans may be risk-averse about floating rates, now is definitely the best time to review your home loans.
- Mortgage Loan Tenure
Another factor that borrowers must consider is the limitation of the loan tenure (or loan term) when buying a local property. Loan tenure refers to the duration of time that borrowers take to repay the entire loan. In Singapore context, the maximum loan tenure for mortgage loans is capped at 30 years for HDB flats and 35 years for non-HDB properties.
Furthermore, borrowers’ age and the loan tenure should not cross 65 years, which implies that if a borrower is 45 years old, he may only be given a loan term of up to 20 years.
- Loan-to-Value Ratio
The loan-to-value (LTV) ratio refers to the maximum limit that an individual can borrow from a financial institution to finance a property loan in Singapore. Most local banks offer a maximum LTV of 75%, subject to regulatory requirements and the bank's prevailing credit policy. For example, an individual who has his eyes on a $1 million dream home, can only get a loan amount up to $750,000 to purchase the property because the LTV is 75%. The remaining 25% of the property value will have to be funded by other means such as cash, Central Provident Fund Ordinary Account (CPF OA), or a combination of both.
Also, the borrower’s age will restrict the LTV limit that a lender can offer. As a guide, the LTV for private properties will be capped at 55% if the loan tenure exceeds 30 years, or if the loan tenure plus borrower’s age extend beyond 65. For an HDB flat, the LTV will be capped at 55% if the loan tenure exceeds 25 years, or if the loan tenure plus borrower’s age extend beyond 65. As a result, the upfront funds needed to purchase the property will also increase. (For HDB Concessionary Loans, the maximum LTV is 90%, and the remaining 10% can be paid by cash, CPF OA, or a combination of both.)
Do note that LTV ratios do not differ based on the type of property purchased, but depend on whom you are getting the loan from. If you are purchasing a HDB flat, but financing it with a bank loan, then the LTV ratio applicable will be 75%, with a minimum 5% paid with cash and the remaining 20% paid with cash and/or CPF OA.
- Mortgage Loan Conditions & Restrictions
Before signing on the dotted line, borrowers should always be mindful of the mortgage loan conditions and restrictions that are attached to their contracts. These details can sometimes be overlooked and later spell more trouble for borrowers.
One important condition to take note of is the lock-in period. Such a condition usually demands a penalty if borrowers choose to redeem or refinance the loan before the lock-in period is up. Early redemption penalty fee can range from 0.75% to 1.5% which can be quite substantial depending on the outstanding loan amount.
In some cases, freebies such as fire insurance, valuation reports or legal fees may even be retracted if borrowers fail to meet the clause. However, if you are selling the house instead, some banks may be able to waive off the penalty. Make sure to read through the terms and conditions clearly before committing to conditions that you are not sure of.
Are there any particular home loan packages that you are interested in? Or are you thinking of refinancing your home mortgage loan to take advantage of the lower interest rates now? If you are looking to find the best loan packages that can suit your needs, be sure to check our mortgage calculator to find out more before making a major financial decision!
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