Guide to Getting a Home Loan in 2021

Buying a property, especially if it is your first property, is always a daunting task. There are plenty of decisions to be made, and for many Singaporeans this will most likely be the biggest financial commitments they will take up.

One of the biggest decisions concerns the source of said financial output. Unless you have a lot of cash on hand (and most Singaporeans do not), buying a property will inevitably involve taking a housing or mortgage loan.

However, that is not a straightforward process at all. There are numerous banks and financial institutions each offering a variety of home loan packages. Which is the best loan deal for you?

In this post, we will be providing comprehensive information on the whole decision-making process that one should embark on before getting a housing or mortgage loan.

HDB Loan vs Bank Loan

If the property you are purchasing is a HDB flat, you may take up a loan from the Housing Development Board itself. This comes with its own set of pros and cons. The intrinsic differences between a HDB loan and a bank loan are as follows:

1) HDB loans require less downpayment, and allows it to be fully paid for through CPF

When taking up a HDB loan, there is a minimum downpayment of 10 per cent (of the property’s valuation) that is required. The good news is that this can be paid for using CPF, as long as there is enough money in one’s CPF Ordinary Account.

In contrast, a bank loan requires a much higher 25 per cent downpayment, of which 5 per cent must be in cash. This requires more financial liquidity on the part of the property buyer.

2) You can get a higher maximum loan from HDB

Since a HDB loan only requires 10 per cent downpayment, this effectively means you can get a maximum loan for 90 per cent of the purchase price, or valuation, of the property. Meanwhile, by mandating a 25 per cent downpayment, a bank loan only covers a maximum of 75 per cent of the property’s price.

3) HDB loans do not have any early repayment penalties

A bank’s primary goal in lending you a large sum of money is to profit off it through charging interest. As such, a bank is not particularly keen to have a bank loan paid off early, and will thus charge an early repayment penalty as compensation.

HDB, as a public authority, does not have any repayment penalties. This goes a long way in encouraging financial prudence.

4) HDB loans are more lenient towards failed repayment

Once more, HDB’s status as a public statutory board is of comfort to a potential loanee. HDB charges a 7.5 per cent per annum late payment fee, and are often willing to make arrangements to defer repayment if a loanee has run into financial difficulties.

As private entities, banks are known to be far less forgiving since it is not in their interest to minimise the repercussions of not being repaid on time.

5) HDB charges higher, but more stable, interest rates

The main caveat against taking a HDB loan: it is pegged to the interest rate of CPF’s Ordinary Account, which is almost certainly always higher than the loan rates offered by banks.

HDB’s concessionary interest rate currently stands at 2.6 per cent per annum. By contrast, banks, who often peg their rates to SIBOR or SORA rates, are not likely to offer rates above 2 per cent, especially with the current economic downturn.

Having said that, HDB’s interest rates experience very little change, while SIBOR or SORA rates can fluctuate quite significantly. Due to Covid-19, however, it is expected that these rates will remain relatively low for the next few years, thus making bank loans more attractive than HDB loans in terms of sheer financial outlay.

6) There are more conditions to fulfill to get a HDB loan

To secure a bank loan, one usually only needs to display good credit. The restrictions placed on getting a HDB loan are far more onerous. These include:

·        At least one of the buyers must be a Singapore citizen.

·        The loanee must not have taken two or more housing loans from HDB previously.

·        Average gross monthly household income must be less than S$14,000.

·        Average gross monthly household income must be less than $7,000 for singles buying 5-room or smaller resale flat, or 2-room new flat in a non-mature estate.

·        Loanee must not own any private residential property, or have disposed of one in the past 30 months before the loan application.

Fixed Rates vs Floating Rates

The next consideration is whether to take on a fixed or floating interest rate package.

For fixed rates packages, the name would imply that a uniform interest rate will be applied and maintained throughout the entire loan period. This is certainly the case for HDB loans.

However, the global economy fluctuates far too much for banks to feel comfortable offering such concrete security. As such, bank loan packages often only provide fixed rates offerings for a certain number of years – known as the lock-in period – before reverting to a floating interest rates plan.

Naturally, floating rates packages refer to an arrangement where the interest rate is expected to change regularly. As mentioned, banks will base their interest rates on the prevailing SIBOR or SORA rates, or even fixed deposit rates. They may offer between 1-month, 3-months, 6-months, and in some cases even 12-months SIBOR or SORA rates for customers to choose to peg their interest rates to.

Choosing which interest rate package to take depends on the following factors:

1) Interest rate trends

If interest rates are rising, locking down a fixed interest rate for a few years would be more beneficial. Conversely, if interest rates are seen to be on a downward trend, the floating rate will ensure a lower interest rate in the foreseeable future.

Naturally, this only applies for the first few years of the loan tenure. Housing loan repayments can take upwards of two decades, and surely nobody can predict the future that extensively. In any case, fixed rates offered by banks tend only to last for three or four years before becoming floating rates packages as well.

2) Financial Certainty

A fixed-rate package provides a more certain figure during the initial repayment years. This has its advantages for people who are calculating exactly how much money they need to fork out. Floating rates, on the other hand, often suit those who are willing to pay regular attention to the fluctuating SIBOR/SORA rates and have a better understanding of where the market is heading.

You may look up the best residential property loan for both fixed rates and floating rates on smart-towkay.com.

Shorter vs Longer Loan Tenures

Another critical decision to make is how long you wish to take to repay the loan.

The first thing to note is that there are limits to how long one can take to repay a housing or mortgage loan. According to the Monetary Authority of Singapore (MAS), the maximum loan tenure for housing loans is capped at:

·        30 years for HDB flats.

·        35 years for non-HDB properties.

HDB loans are an exception; those are capped at 25 years.

In addition, one must take the mortgage servicing ratio (MSR) and the total debt servicing ratio (TDSR) into consideration as well. These serve to limit the proportion of gross monthly income that can be used to repay the loan.

MSR applies only to buyers of HDB flats and Executive Condominiums, and caps the amount that you can spend on mortgage repayments to 30 per cent of your gross monthly income. It does not consider any other loans you might have.

TDSR covers more extensive restrictions. It applies to both public or private property loans, and takes into account all other loans you might have taken up. This can include car loans, education loans, and prior housing loans. The total loan payments for all these debts must not exceed 60 per cent of your gross monthly income.

For salaried employees, gross monthly income is composed of basic wages, overtime pay, commissions, tips, other allowances and one-twelfth of any annual bonuses. Employee contributions to CPF are included, but not employer contributions. Personal income tax is also factored in.

For those who are self-employed, gross monthly income refers to the average monthly profits from your business, trade or profession before deduction of income tax.

Many calculations are necessary to ensure compliance with these rules, but the basic implication is clear: if your gross monthly income is too low, you are compelled to take a home loan with a longer loan tenure, but you are still expected to repay it within the time limit. This narrows both risks and options for potential home buyers.

With these restrictions in mind, we now look at how to choose between a longer or shorter loan tenure.

1) A longer loan tenure provides better cash flow in the short-term but requires higher financial outlay in the long run

Obviously, a shorter loan tenure mandates higher monthly repayments. As such, when a longer loan tenure is taken up, there is a lighter financial burden to bear for each individual month. This can be of paramount importance if a certain amount of disposable cash is needed. Reasons for this include healthcare costs, other emergencies, or simply because you wish to make other investments which can yield higher returns.

The other side of the coin, of course, is that more money will be paid out as interest over time the longer you take to repay the loan. Make no mistake, the difference in interest payments can get staggeringly high. It also means that one has to factor this when planning for their retirement; early retirement is more unlikely if one is still saddled with debt three decades on.

2) Longer housing loans offer more flexibility

Simply put, you can pay back a loan earlier despite the initial loan tenure being longer, but it is much more difficult to extend the repayment period of a shorter loan.

This is especially true for HDB loans, which have no early repayment penalties. For bank loans, one would have to take into account any early penalty imposed by the bank and decide if there are still any net savings to be gained.

3) You have to take your other debts into account

As explained, TDSR effectively limits the total amount of debt you can take on, depending on your income. Taking a longer home loan with lower monthly payments will free up more financial space to take on additional debt. This can be helpful if one wishes to take on another home loan in order to purchase more properties, for example.

A shorter home loan puts a lot more towards that TDSR limit.

Read also: Should You Refinance Your Property Loan? And Should You Opt For a SORA-Pegged Home Loan Now? 
Read also: PROPERTY 101: What’s The Difference Between Joint Tenancy vs Tenancy-in-Common

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