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As long as you didn't grow up under a rock, you'd know that property prices in Singapore are one of the highest in the world. In fact, according to the 2019 Global Living report by CBRE* comparing 35 global cities, when it comes to expensive residential housing, Singapore is second only to Hong Kong.
... Which means, if you're a prospective home buyer, chances are, you'll need to get a housing loan to finance your property purchase. After all, most of us don't have millions of dollars just sitting around in the bank!
Mortgage and housing loan terminology can seem pretty complicated for those who are not familiar with it. If this is your first time, don't worry: it’s not rocket science.
First of all...
What does mortgage mean? Is it the same as a home loan?
Let's start with the basics:
A mortgage is a loan that uses your property as collateral to borrow funds. It is used as security, so if you default on payments, the bank (or whatever financial institution) can sell your property to make up for the losses. You may use your borrowed funds for anything.
A home loan is a type of mortgage loan. It just specifies beforehand that the funds borrowed must be used to finance the property purchase. Put simply, it just means that you're taking out a loan to pay for your home, and not say, some fancy car.
Although technically speaking they're not entirely the same, in Singapore, the term 'mortgage' or 'mortgage loan' is often used to mean home loans. The two are frequently used interchangeably.
A useful guide to housing loan jargon in Singapore
Now that that's out of the way, here are some other mortgage and housing loan jargon that will be helpful to know when you’re trying to apply for a housing loan in Singapore.
Want to save more on your existing mortgage? Compare the best home loan rates in town or check out PropertyGuru Finance for more personalised advice and recommendations:
Approval-In-Principle (AIP)
This is an agreement with a bank that states the bank’s promise to lend you money for your home loan when you need it. Approval-in-Principle (AIP) is granted based on your credit history and score, and how good your overall financial health is.
Banks won’t grant you an AIP if they’re not confident that you can handle the repayment of the loan amount that you’re asking for. This may be due to you having bad credit history, or too many debt obligations.
Once granted, the AIP is typically valid for 30 to 90 days. It is advisable that you find out what your AIP loan amount is before committing to a property purchase.
Additional Buyer’s Stamp Duty (ABSD)
ABSD is a tax levied on property buyers who are purchasing their second, third, or subsequent property in Singapore.
Introduced in 2011 to cool the residential property market, the ABSD framework was further enhanced in 2013 and 2018.
If you're buying your first home, you do not need to worry about paying ABSD.
Board Rates
The board rate is an index used by individual banks to determine the interest rate for your home loan. Unlike SIBOR or SOR packages that are pegged to a published rate, different banks have different board rates.
Bridging Loans
Considered a short-term funding option, bridging loans are used to ‘bridge’ the gap between the debt becoming due and the credit becoming available.
That sounds complicated, but it's not really:
For example, if you’re selling your property and moving to a new home, you may face a situation where the downpayment for your new home is due before you receive the cash proceeds from the sale of your existing property.
In this case, you can get a bridging loan to make the downpayment first. It can also be used for the payment of stamp duty and legal fees.
Cancellation Fees
A cancellation fee is payable if you accept the bank’s offer letter, but do not proceed with the loan before receiving the loan amount.
For example, in such an instance, DBS charges a cancellation fee of 0.75% of the undisbursed loan amount.
Certificate of Statutory Completion (CSC) and Temporary Occupation Permit (TOP)
The Commissioner of Building Control issues a Certificate of Statutory Completion (CSC) or Temporary Occupation Permit (TOP) to a building project when building works are completed.
These are certificates that verify that the building is stable and suitable to be occupied. It just means they're ready for you to move in!
Property developers usually apply for a TOP once certain requisites are complied with. When all requirements are met, they will then apply for a CSC, which is compulsory to acquire.
Here’s a quick overview of the differences between TOP and CSC.
What is it?
- Allows homeowners to live in a residential development even with certain amenities incomplete
- TOPs are optional
- Allows a development to be legally occupied
- A TOP can be applied for when the developer is in the process of obtaining a CSC
- A CSC has to be eventually acquired
Combo Housing Loans
Combo housing loans are loan packages that are split into two or more separate loans, with different payment schemes for each one. For example, you can split a $200,000 loan into two $100,000 loans - one on a fixed rate and the other on a floating rate.
Fire Insurance
Fire insurance protects your property against loss and damages caused by fire. Buying fire insurance is compulsory for HDB flat owners who have taken up a HDB loan, and private property owners who have taken up a bank loan.
Fixed Interest Rates (usually bank loans)
A fixed interest rate is an interest rate that’s locked for a certain period, regardless of market conditions.
This usually refers to bank loans. The HDB housing loan may seem like a fixed rate because it's been stable for so long, but it's actually pegged at 0.10% above the prevailing CPF Ordinary Account (OA) interest rate.
So while it has not changed in decades, technically it may be adjusted in January, April, July, and October, in line with CPF interest rate revisions.
Floating Interest Rates
A floating interest rate is an interest rate that changes according to market conditions.
Floating interest rates are usually pegged to some sort of index. In addition to the above example about HDB housing loans being pegged to CPF rates, there are also SIBOR floating rate packages which are very popular in Singapore.
Foreclosure
This is the process whereby a lender repossesses a borrower’s property in order to recover the balance of a loan from a borrower who has stopped or is unable to pay mortgage payments.
Income-weighted Average Age
When a property has more than one buyer, the income-weighted average age is used for calculating loan tenure. This is to prevent older borrowers from listing younger people (some with little or no income) to get longer loan tenures.
This is how the income-weighted average age is calculated:
Income-weighted Average Age = Borrower 1 [(Age x income) / Total income] + Borrower 2 [(Age x income) / Total income] |
Legal Subsidy (Refinancing)
When you refinance your home loan, there is a legal fee that typically costs $2,000 to $3,000.
Banks used to subsidise the legal fee, but since 2013 when MAS introduced new restrictions, banks only offer a legal subsidy if a large amount of money is borrowed.
Letter of Intent (LOI)
An LOI outlines a preliminary agreement between two parties before a transaction is finalised. In Singapore, this is usually provided by a tenant to a landlord to indicate intent to rent a property.
Letter of Offer (LO)
This is the contract the bank offers when you take out a loan.
Loan Tenure
Loan Tenure is the period of long you’ll take to fully repay your housing loan.
For HDB flats, the maximum loan tenure is capped at 25 years (HDB loan) or 30 years (bank loan).
Loan to Value (LTV) Ratio
LTV is the ratio of how much you can borrow to the value of the property.
For HDB loans, the maximum LTV is 90%. For bank loans, the maximum is 75% for the first loan.
For example, if you took out a loan of $500,000 for a house valued at $800,000, your LTV is 62.5%.
Lock-in Period (Bank Loans)
A pre-determined number of years where you’re tied to the bank after taking out a bank loan. If you switch banks or change the loan terms during the lock-in period, you’ll incur a penalty fee which is typically 1% to 2% of the outstanding loan amount.
Mortgage Servicing Ratio (MSR)
Mortgage Servicing Ratio (MSR) is the proportion of your monthly gross income that is spent on your mortgage repayment. According to MAS policy, your MSR must not exceed 30%.
The MSR only applies to HDB flat and executive condominium purchases, so if you're eyeing private properties, you do not need to consider this.
The TDSR framework goes into determining the maximum housing loan you can take
Total Debt Servicing Ratio (TDSR)
TDSR is the proportion of your monthly gross income spent on all debt obligations. It includes your credit card balance, car loan, student loan, personal loan, and any credit term instalment plan you have.
A TDSR framework was implemented by MAS in 2013. Under the framework, the amount that you can spend on your monthly debt repayments is limited to 60% of your gross monthly income.
Singapore Interbank Offer Rate (SIBOR)
SIBOR refers to the rate that financial institutions in Singapore lend and borrow unsecured funds to and from each another. It is also the rate at which most floating rate home loans are pegged at.
Your mortgage loan can be based on the 1-month or 3-month SIBOR. If your loan is based on the 3-month SIBOR, the interest rate will be the 3-month SIBOR plus a margin for the bank, and revised every 3 months.
Stress Test Interest Rate
A medium-term interest rate, nominally 3.5% for residential properties, applied to be sure that borrowers can still make their repayments should interest rates go up.
Swap Offer Rate (SOR)
SOR is the SIBOR in addition to the lending costs incurred by banks. It is a benchmark rate for short-term interest rates in Singapore, and is commonly used to measure the cost of commercial loans. It reflects market conditions and is as transparent as the SIBOR.
Valuation Fee
A valuation fee is payable for the process of determining the market value of a property. Property valuation is required for a bank to calculate the maximum amount a property buyer can borrow.
* CBRE report: Singapore remains the 2nd most expensive housing market in the world after Hong Kong