The “best” home loan means different things for different borrowers. It’s not always about getting the one with the lowest interest rate; you need to choose one that suits your situation. That’s why it is important to understand the various types of home loans available before you can compare them.
There are two main types of mortgage loan options in Singapore: HDB loans and bank loans.
You can use an HDB loan when purchasing public housing, otherwise known as HDB flats. You can also use a bank loan to finance your HDB flat purchase. On the other hand, you can only use a bank loan to finance a private property purchase, such as a condominium.
The HDB loan is pegged to the CPF interest rate + 0.1%, which currently stands at 2.6% (at the time of writing, 23 January 2020). This is slightly higher compared to the rates offered by banks. But due to the stability of the HDB loan rate, it is suitable for borrowers who want to know exactly how much they need to pay each month.
Another advantage of taking out an HDB loan is that the down payment required is only 10% compared to the 25% required for a bank loan. This makes it ideal for homebuyers with less cash on hand for their property purchase.
The notable downside of an HDB loan compared to a bank loan is that the maximum loan tenure is only 25 years, or until the borrower turns 65, whichever comes first. On top of that, your monthly repayment must not exceed 30% of your salary. This is known as the Mortgage Servicing Ratio (MSR).
Bank loans can be used to finance the purchase of both HDB flats and private properties. There are many different types of bank loans to choose from and each bank could offer loans that are slightly different. You don’t have to take a mortgage loan from the bank that you are currently using, so make a choice according to how competitive the rates are, as well as any perks that appeal to you.
Mostly, bank loans can be classified into fixed-rate or variable rate loans. A fixed-rate loan means the interest rate on your loan will stay the same for a certain period of time, usually between 1 and 3 years. Using a fixed-rate loan gives you the certainty of the amount that you’ll need to set aside for repayments each month.
In the last few years, a new type of bank loan has emerged and remains quite popular with borrowers. While banks might name the loan differently, it is essentially pegged to the fixed deposit rate with a spread on top of it. This type of loan is pretty stable as banks generally avoid raising the rates so they need not pay a higher rate for their fixed deposit accounts.
Fixed or variable rates?
One of the most difficult choices for home loan borrowers is to decide between getting a fixed or variable rate loan. In considering this, it is key to understand how interest rates will behave in the next two to five years and how it can affect your overall cost.
Variable-rate, or a floating rate loan, usually pegs the loan’s interest rate to either the Singapore Interbank Offer Rate (SIBOR) or the Swap Offer Rate (SOR). These rates are less stable compared to a fixed-rate loan, but could offer the opportunity of lower interest rates depending on the global interest rate environment.
Generally, when overall interest rates are stable or declining, it could be wiser to choose a variable rate home loan. Floating rates tend to be lower than fixed rates as banks will price in a premium in order for you to have certainty over the amount you’re paying each month.
In an environment where interest rates are rising, it could be a better idea to take on a fixed-rate loan. This can help you lock in the rates that you are offered and save on the costs of interest when market rates rise significantly.
Now that you have a better understanding of the types of home loans available in Singapore, you can start comparing mortgage loans with these 3 criteria:
Type of rates. Depending on whether you prefer a stable monthly repayment and your interest rate outlook, choose either a fixed or variable rate loan.
Cost of borrowing. The interest rate is definitely a key factor for many borrowers. While you may begin by looking for one with the lowest initial rates, you may want to focus on a loan that offers you the opportunity for free refinancing when market conditions change.
Loan conditions. Once you have compared the mortgage loans based on the 2 factors above, you might want to take a look at the loan conditions since it can affect the overall cost of the loan in the long term.
Some of these conditions include:
Prepayment penalties. You might decide a few years later that you’d like to pay off some of the loan repayments, say, because you received a huge bonus. Some of the banks may actually impose a prepayment penalty, since your prepayment means they get to earn fewer interest payments. The penalty could be substantial, usually around 1.5% of the redeemed amount.
Refinancing charges. Given the competitive mortgage loan environment in Singapore, it is not uncommon to see banks offering a one-time free refinancing with your loan. However, some of these loans may require you to pay a fee for refinancing or repricing so make sure to clarify this before taking up the loan.
Clawback of perks. Banks may offer additional perks to attract borrowers. Some of these include free fire insurance or legal subsidies. Be aware that in the fine prints, they may state that their right to claw back these privileges should you choose to refinance or reprice your loan within a certain period. Thus, if you choose to refinance your loans, you should also consider the overall costs to gauge whether it is truly worthwhile.
Know your eligibility. New home-buyers sometimes forget that buying their ideal homes require the ability and responsibility of financing them. It is thus important to find out exactly how much you can borrow before you go house-hunting. Your loan eligibility is determined by your Total Debt Servicing Ratio (TDSR) or Mortgage Servicing Ratio (MSR, depending on whether you are getting a bank loan or an HDB loan.
Get an In-Principle Approval (IPA). An IPA is an estimate given by banks to prospective home-buyers before finalising any property purchase or refinancing. When you apply for an IPA, the bank will evaluate your credit history. This will also help you understand your home loan eligibility and focus on properties that are affordable to you. When you apply for an IPA, most of your initial verification is already done, which also helps to streamline the eventual loan process.
Apply for a home loan. Once you get your IPA and find your desired property, you’re all set to getting your mortgage loan.
When you have made up your mind on the type of home loan you want, you can get quotations from various banks to find the best possible deal.
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