How To Choose A Home Loan In Singapore

For most, buying a property in Singapore will entail getting a home loan. Unless of course, if you are wealthy or cash-rich. Foreigners who are interested in acquiring a property in Singapore can also apply for a housing loan in Singapore, subject to meeting certain credit criteria such as proof of income or net worth statement.

Investing in a property is a huge commitment that is likely to weigh most of us down financially for the next 20 to 30 years. Whether you are a married couple or a single looking to purchase a HDB flat or private property, one of the most important decisions is how to finance your property.

Choosing A Home Loan

When buying a HDB flat, applicants have the option of choosing a HDB concessionary loan or a bank loan. In all likelihood, most would apply for a HDB concessionary loan (which is currently fixed at 2.60%), or a bank loan where they have an existing relationship out of convenience. (Note: Buyers of private properties are not eligible for a HDB concessionary loan).

Most borrowers will also tend to focus on the interest rate when deciding on the home loan package. For most bank loans, they may seem to offer similar interest rates. However, on closer examination, there can be big differences between them. Hence, choosing the right one can save you money and also provide flexibility should you wish to refinance your housing loan later on.

Some of the factors borrower should look out for include service fees, refinancing restrictions, early loan redemption penalty, and many others. Below, we will highlight some of them.

HDB Concessionary Loan

For many HDB flat applicants, the HDB concessionary loan is their default option, and for good reasons. It is easily approved and if you have sufficient money in your CPF Ordinary Account (OA), you can use them for the downpayment.

HDB also provides up to 80% Loan-To-Value (LTV) financing of the purchase price or valuation of your HDB flat, whichever is lower. You also pay a fixed rate of 2.6% (0.1% plus 2.50% of the CPF OA interest rate), which has remained stable for the last 20 years or more. This provides certainty on your monthly loan repayments while removing any worries over potential rising interest rates in the future. In other words, it is good home loan option for borrowers who are more risk-averse.

Bank Loan

There are basically two main types of home loan banks offer – fixed-rate and floating-rate. Fixed-rate loans usually charge higher interest rates, but they provide certainty over monthly loan repayments and protect you from future interest rate increases. However, do take note that banks only offer fixed rates for the first few years ranging from 1 to 5 years. Subsequently, they will revert to floating rates.

For floating-rate loans, the interest rates are variable. In the past, they were pegged against the 1-, 3-, 6- and 12-month Singapore Interbank Offer Rate (SIBOR) or Swap Offer Rate (SOR). The home loan rate was then fixed at a spread over SIBOR or SOR. For example, SIBOR + 0.5% or SOR + 0.5%.

However, since 30 August 2019, the Association of Banks in Singapore and the Singapore Foreign Exchange Market Committee (ABS-SFEMC) have recommended SORA as the most suitable and robust benchmark. Hence, banks in Singapore have started to phase out SIBOR and SOR-based home loans since 2020.

What is SIBOR, SOR And SORA

SIBOR stands for Singapore Interbank Offered Rate. It is the interest rate that banks in Singapore charge each other for borrowing or lending money in the interbank market. SIBOR is administered by the Association of Banks in Singapore (ABS) and they are derived randomly from what some banks in Singapore quote on a daily basis.

SOR stands for Swap Offer Rate. It is derived from the interest rate differential between the Singapore and U.S. dollar, as well as the foreign exchange rate between the two currencies.

Both SIBOR and SOR generally move in the same direction, although the latter tends to be more volatile as it affected by the movement in the USD/SGD exchange rate.

SORA stands for Singapore Overnight Rate Average. It is the volume-weighted average rate of actual borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8 am and 6.15 pm daily. The Monetary Authority of Singapore (MAS) will then validate the data and calculates the volume-weighted average rate of all eligible transactions and publish them at 9.00 am the following day.

The versions most used by banks for their floating home loan packages are the 1M and 3M Compounded SORA, which are the average of SORA rates published in the last 1 or 3 months.

Home Loan Quantum

For HDB concessionary loans, borrowers can borrow up to 80% Loan-To-Value (LTV) of the price or value of the property, whichever is lower, provided the lease of the property can cover the youngest buyer to age 95. The balance of 20% can be paid either by cash or CPF OA monies. The maximum loan tenure is 25 years. But if the HDB flat can’t cover the youngest buyer to the age of 95, the LTV will be pro-rated from 80%. In addition, HDB will not grant any home loan for HDB flats with a remaining lease of 20 years or less.

As for bank loans, the LTV is 75% of the purchase price or value of the property, whichever is lower, up to a tenure of 30 years. For the balance of 25%, 5% must be paid in hard cash and the rest in either cash or CPF OA monies. However, the LTV will drop to 55% for a tenure above 30 years or when it extends past the borrower’s age of 65. For the balance of 45%, 10% must be paid in cash and the rest in either cash or CPF OA monies (please refer to the infographic below). Further information can be found in “Change In CPF Usage And Housing Loan Rules”.

Loan-to-Value (LTV) Chart

Although the current CPF home loan rate at 2.60% is higher than a bank loan around 1.0-1.5%, the cash downpayment for a bank loan is significantly higher. Hence, you will need to evaluate your financial position carefully before investing in a property.

Home Loan Conditions And Penalties

Besides interest rates, there are terms and penalties that you need to consider when choosing your home loan. These include the following:

Lock-in Period – This is the period where the borrower is “locked in” with the bank to enjoy a promotional interest rate. This “locked in” period can be between 1 to 5 years. This feature prevents the borrower from switching to another bank during this period in return for a lower interest rate. In the event the borrower decides to redeem his home loan in full during the lock-in period due to the sale of the property for example, the bank usually levies a penalty of 1.5% on the outstanding loan amount. This could easily wipe off any savings gained from the promotional interest rate.

Partial or Full Loan Redemption Penalty – Partial or full loan redemption can happen if the borrower receives a windfall such as a huge year-end bonus or striking lottery for example. As explained above, they will usually attract a penalty charge of about 1.5% on the outstanding loan. Then again, some banks may provide a certain percentage of loan redemption, say up to 20%, without penalty even during the promotional period. Some banks may also require that you to keep a certain minimum loan amount after partial repayment, for example, an amount of $200,000. Hence, you should find out such terms and conditions with the bank before committing.

But for HDB loans, there is no penalty for partial redemption. But for full repayment, a registration fee of $38.30 and a conveyancing fee between $23.30 (1-room flat) to $82.35 (Executive flat) are payable. More details can be found here.

Refinancing Fees – Refinancing means switching to another home loan package with another bank after you have completed your lock-in period. This is to take advantage of the lower interests at that time, if deemed beneficial, after taking into account all the related costs for breaking the home loan. Alternatively, you may do a re-pricing which is refinancing your home loan with your existing bank. Again, you need to consider the processing fee charged which can range from $200 to $800. Hence, before deciding to refinance or re-price your home loan, work out whether there are any savings left after incurring all the charges.

For borrowers of HDB loans, they can switch to a bank loan in the future to take advantage of the lower interest rates. But once switched, they can’t revert back to a HDB loan.

Subsidy Clawbacks – Banks usually provide some freebies or subsidies to entice borrowers to apply for a home loan with them. These may include fire insurance premiums, and legal and valuation fees. However, they may come with clawbacks and borrowers will need to refund their banks if they wish to refinance their loans within 3 years for example. The amount of clawback can amount to about $2,000.

Interest Rate Reset Date – If a borrower is on a 3-month SORA-pegged floating-rate loan, for example, the interest rate will only be reset every 3 months. Should the borrower make a partial or full repayment of the loan or wish to refinance it before the interest rate reset date, a breakage fee of 0.5% (depending on the bank) may be levied on the outstanding loan amount.

Late Repayment Penalty - If you fall behind on your monthly home loan repayment, a penalty will be levied on you. This could either be a fixed percentage on the payment due or a flat fee of about $80. In order not to overlook your monthly home loan instalments, it’s prudent to apply for Giro.

Cancellation Fee – Unless you are certain about applying for a home loan from a particular bank, don’t commit to it first. Banks may levy a cancellation fee of about 1.5% on the amount cancelled.

Loan Structure - Most banks structure their home loan packages on a “step-up” basis. This means the loan rate gets progressively more expensive as time passes. But there are some that reward their clients for loyalty, offering “step-down” loan packages which get cheaper the longer you stay with them.

Other Property Financing Factors

Besides the various terms and conditions attached to home loans highlighted above, below are two important property financing factors to take note of as they can limit the amount of housing loan you are eligible for and ultimately, your affordability They are:

• Debt servicing limits
• Property stamp duties

Debt Servicing Limits

How much you can borrow to finance your property can be limited by two debt servicing limits imposed by the Monetary Authority of Singapore (MAS). These are:

• Mortgage Servicing Ratio (MSR)
• Total Debt Servicing Ratio (TDSR)

Mortgage Servicing Ratio (MSR) – MSR currently sets a 30% limit of the borrower’s gross monthly income that can be used to finance his or her HDB home loan. MSR will also apply to the financing of executive condominiums.

For example, if the borrower’s gross monthly income is $5,000, the monthly loan repayment cannot exceed $1,500 (30% x $5,000).

If your property is jointly purchased with your spouse, then both your income can be taken into account.

Total Debt Servicing Ratio (TDSR) - TDSR takes into account all outstanding loan commitments (e.g. home loan, car loan, study loan, credit card debts, and so on). These loans/debts are capped at 55% of the borrower’s total gross monthly income.

For example, if the borrower’s gross monthly income is $5,000, the monthly total debt repayment cannot exceed $2,750 (55% x $5,000). This will include the borrower’s monthly mortgage. [Note: Those earning variable income such as salesperson, their gross monthly income will be subjected to a 30% haircut for calculation of TDSR].

Effectively, both the MSR and TDSR seek to ensure financial prudence as well as prevent over-spending by Singaporeans. Indirectly, they also help to curb property speculation by preventing over-leveraging of one’s income.

Property Stamp Duties

Property stamp duties are taxes on dutiable documents on any immovable properties in Singapore. They are computed on the purchase price or value of the property, whichever is the higher amount, stated in the document to be stamped. They are payable to the Inland Revenue Authority (IRAS).

When buying a property, there are two stamp duties to take into account - Buyer's Stamp Duty (BSD) and Additional Buyer's Stamp Duty (ABSD). Taking note of these property policies is important because they can add substantially to th cost of your property acquisition.

Buyer’s Stamp Duty (BSD) - When buying a property in Singapore, regardless of whether it is a public or private home, the buyer’s stamp duty (BSD) is payable. BSD is levied on the purchase price of your property based on the rate shown below. It can add substantially to the overall cost of your property purchase. Hence, it needs to be factored in to determine the overall cost and your affordability.

Additional Buyer's Stamp Duty (ABSD) - Additional Buyer’s Stamp Duty (ABSD) is levied on the following:

• Singapore Citizens (SC) buying their second and subsequent residential properties
• Singapore Permanent Residents (SPR) buying their first and subsequent residential properties
• Foreigners (FR) and Entities buying any residential properties (Note: Nationals or Permanent Residents from Switzerland, Norway, United States, Iceland and Liechtenstein are eligible for ABSD remission under Free Trade Agreements (FTAs) and are accorded the same Stamp Duty treatment as Singapore Citizens)

How much ABSD a property buyer will incur will depend on his/her status as indicated below:

More details can be found in “How to Calculate Singapore Property Stamp Duties”.

Conclusion

Now that you are armed with the necessary information, you will be in a better position to shop for a suitable home loan. It’s important to figure out what you truly need and how you can manage the financing at the present and in the future.

In addition, you will need to take into account the following considerations when taking up a home loan:

• How big a loan you can afford.
• What is the length of the loan.
• How much personal savings and CPF funds are available for the downpayment of your property purchase.
• How much can you afford to set aside for the monthly home loan installments.
• Will there be future cash injections (e.g. year-end bonuses).
• Any plans for partial or full loan redemption in the future.

Besides the above, you will also need to take into account other costs of home ownership such as renovation and repair costs, utility bills, maintenance fees (for condo) or conservation (for HDB) fees, and property tax.

It is also prudent to set aside some savings, in case you need money for other unexpected expenses or contingencies such as loss of job or medical treatments. If you have any queries about property investment or home loan, please feel free to Email or WhatsApp Us.

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