Types of Home Loans & Financing Procedures in Singapore
Because of the different types of homes in Singapore, getting a home loan can be quite different from other countries in the region like Malaysia. However, the standard issues are applied like interest rates and lock-in periods.
Before you start thinking about applying for the loan, you must have the type of home in mind. One thing for sure, properties in Singapore are very expensive. In fact, they are among the most expensive ones in the region, if not the world. As such, you might want to consider what type of home you are buying prior to applying for the loan.
This is among the most popular type of properties in Singapore. HDB flats were provided as an initiative by the Singapore government to help affordability among its people. As such, it continues to be the most widely used homes. In fact, HDB flats cover around 80% of the total properties in Singapore. Although they are far cheaper than urban homes like condominiums, we are still looking at hundreds of thousands of Singapore dollars. Home loans in this context usually involve fixed rate packages while there are some which provide floating rate loans. Most banks in Singapore offer such loans with the 3 major ones leading the market.
- UOB Bank
- OCBC Bank
- DBS Bank
The fixed rate home loan for HDB Flats usually charge interest rates between 15 and 20% which is quite competitive in the market. If you are applying for a loan of about $500,000, that would come out to about $2,000 in terms of monthly installments. Lock in periods usually goes at around 2 years.
Floating Rate Home Loans for HDB
On the other hand, you can opt for a floating rate home loan if you are buying a HDB flat. How this works is that the rate is pegged at a certain level that changes over time. This is why it is called ‘floating’. Most banks usually offer these loan packages and among those that are quite popular include:
- HSBC – starts with a 1% interest for the first year
- DBS – has a 1.45% interest for the first year
- UOB – 1.4% interest rate from year 1
Loans for private properties
While HDB flats take up about 80% of the total market, the rest are made up of private residences. This simply refers to the urban homes that include landed properties and condominiums. While a HDB flat can go up to hundreds of thousands of dollars, private residences will surely breach millions. Most of the eligible people would be foreigners, expatriates and permanent residents in Singapore. When it comes to private residences, there are both fixed and floating loans as well.
Fixed home loan for private residence
Banks usually offer these types of loans and if you are planning to apply for such loans, you need to consider looking for those that are lower than the market. What you want to look for is a loan that requires you to pay a monthly installment of about $2,000 per month for a loan of about $500,000. However, in most cases, you will need to get a loan of a lot more than that because private residences are never lower than $1,000,000.
Meanwhile, take note that you should look for a way to minimize your total interest while ensuring that you can afford your monthly installments. Other issues that need to be considered include the flexibility of the loan.
Refinancing your home loan
Like other markets, refinancing your home is quite a common move if you find a better loan package or if you would like to free up some cash. It has been recorded that Singaporeans are prone to refinancing their homes once every few years. In most cases, you will find the bank you would like to work with and to have a conversation. The bank will find out what your interest rate was and would propose one which is lower. Having said that, you must take other factors into consideration because there might be hidden clauses like legal fees and stamping charges.
Jumbo-sized home loans
This type of loans are for those who are planning to buy very expensive real estate. The jumbo home loan are offered by banks in Singapore with special rates. The idea here is to offer you a loan with a good interest rate but there will surely be some form of condition. This includes:
- A minimum loan amount – usually at least $1,000,000 or $2,000,000 and then work upwards
- Minimum term – The longer it takes, the better the rates would be.
Be prepared to pay up to $8,0000 per month in installments if you are taking such a loan.
Property under construction
Banks do offer loans for property which are still under construction. These packages usually have zero lock-in periods which means you have the freedom to refinance the property as and when you wish. The idea here is so that you can decide to take up another loan with a better interest rate when the construction of the property is completed.
Choosing the most suitable loan
Since there are so many types of home loans available, you should be mindful of certain issues when it comes to deciding which one is most suitable. One thing for sure, you need to flourish as many as 14 documents before the loan is processed. Then, you need to look at interest rate which would determine how much you need to pay monthly and for how many years.
Another factor that you must really consider is flexibility. Does the loan allow you to pay off your outstanding balance without imposing any penalty? Are you allowed to refinance your home loan (as practiced by most Singaporeans)? How about legal fees, processing fees and others? Imagine if a 1% is charge for legal fees, the amount can be extremely high.
House Financing Procedures
Whichever way you see it and whatever loan you plan to take, getting a home loan could well be the biggest financial commitment in your life. In fact, it constitutes the largest portion of financial commitments for most Singaporeans today. If you are planning to get a home loan, you need to plan this carefully because it will tie you in for the long term.
There are several factors that you must consider before buying a home. This is where you must think about:
- how much you can afford
- your current income status
- what you have in your savings
- existing commitments and debts
- expenses and things you need to spend on
- your eligibility
First and foremost, you must know certain terms and conditions in home financing. Below are some of those that you might come across:
- Deposit or down payment
- stamp duty
- legal fees
- commission for sales agents
- option fees
The list above are upfront payments that you must put aside before you can apply for a loan. In other words, you need to have this amount before even considering buying your house.
Meanwhile, once you have you upfront payments taken care of, you need to consider your other fees and charges. This includes:
- Monthly installments
- fire insurance
- management fees
- insurance for mortgage
- Property taxes
- utilities and other bills
How to determine what you can afford?
The most crucial factor here is to know what you can afford in the long term. This is something you need to make sure is possible. To calculate what you can afford to pay, you need to first get your upfront costs in place. Then, look at the monthly installments as well as other payments like property taxes and mortgage insurance.
While your CPF (Central Providence Fund) can be used to pay your upfront payments, it cannot be used for fire insurance, management service fees, property taxes, conservancy fees and mortgage insurance. This simply means that you need to put aside some cash to pay when needed. On another not, it is advised that you set aside some cash if you take up a floating rate loan where the interest rate might go up at times.
Using your CPF savings
While many will tell you that it is possible to use your CPF savings to buy your home, it is not advised to use up too much of it because it is meant for retirement. The main idea here is to finish paying off your bank loan before you reach 50 years of age because that is when contributions to your Ordinary Account in your CPF will be reduced. So, besides your CPF, you should consider using the following to pay your installments.
- Your own savings
- profit or sales proceeds from a current property
- your monthly salary
Your CPF could be used to pay for part of the house or to service the loan in some way. However, take note that if you are taking up a property loan from the bank, there is a cap to the amount of the CPF savings that you can use known as the CPF Withdrawal Limit. This is set at 120% of every property’s Valuation Limit. The Valuation Limit refers to the valuation of the property when it was bought. This is how you calculate the limit. For instance, if the house is SGD600,000 and the valuation is SGD660,000, then the Valuation Limit would be at SGD600,000 and the Withdrawal limit you can take from your CPF is SGD720,000.
What you should know about house financing?
Financing a house in Singapore is where you take a home loan, usually from a bank. This is an amount of money you borrow to buy a house and is paid back via monthly installments inclusive of the interest. What you need to do before taking a loan is to know how much you can pay back. This can be ascertained through viewing the repayment schedule which allows you to gauge how much you are expected to fork out. In Singapore, before you decide taking a loan, the bank will give you a residential property loan fact sheet so that you are aware of the terms and conditions of the loan you are about to enter into.
Here are houses that you can apply for home loans:
- HDB Flats – available for both resale and direct purchase properties
- private properties – both those that are still under construction and completed
Roles of Banks
Basically, banks offer the loan but will start charging you interest from the date they first disburse the loan. In most cases, the disbursement is carried out in stages (mostly in new properties) and you will be paying the bank progressively.
How the banks decide
When you submit your application for a home loan, the banks will take into consideration 2 very important criteria:
TDSR or Total Debt Servicing Ratio
How this works is that your monthly obligations in terms of loans will be calculated as per your monthly income. This will take into consideration your current home loan, any car loans, overdraft facilities, personal loans and such. It is a regulation in Singapore that your monthly repayment installments of your total property loans and other debt commitments must not exceed 60% of your TDSR. This will help you to avoid falling into debts you cannot get out of. Meanwhile, if you are taking a loan to purchase HDB flats, your monthly repayment amount must not be more than 30% of your monthly gross salary.
LTV or loan-to-value Ratio
This refers to the amount of the loan from the property’s value. As a guideline, if you are buying a HDB flat without any housing loan outstanding and applying for a tenure not more than 25 years and the sum and time does not go longer than 65 years, then the LTV ratio is 85%.
Types of home loans in Singapore
Banks in Singapore generally offers 2 types of packages for house financing which are:
- Fixed-rate – Usually involves offering fixed rates in the earlier period and then floating rate is applied
- Floating rate – known as variable rate which is applied by a reference interest rate.
- promotional rate – in most cases, it is given out in the first few years of your loan to attract buyers
Take note that you are aware of how the reference rate is derived and how often it is changed so that you are aware of how much you are paying for.
Knowing your documents
Once you have submitted your documents for processing and when your loan is approved, then you will be provided with several documents by the bank to ensure your rights are protected. This include:
- the Residential property loan fact sheet
- the offer letter
- Terms and conditions – this is in relation to the house financing loan
- related documents like your fees schedules and such
Refinancing – What is it?
When you decide to switch to another loan for certain reasons, that is when refinancing works. In most cases, people refinance their house loans because of a newer package which has a lower interest rate. This helps you to save some money particularly in the long run. In Singapore, this is often referred to as conversion or re-pricing.
You can only ascertain if you need to refinance your property if you are in touch with your housing loan. This means you need to review your loan every few years or speak to your agent. Check with the bank that offered you the loan on your refinancing options. This is because some loans come with a lock-in period which means you will not be allowed to refinance in the first few years of the loan. Once your refinancing process is complete, you will then enter a new loan but it could mean freeing up some extra funds. The CPF Housing Withdrawal Limit for Singaporeans can be used for this purpose.