A property purchase – whether as a home or for investment purposes – is a major commitment no matter your financial situation. Even before the search begins for your new home, however, you need to decide what kind of home loan (or mortgage) you want to take on. Here is a helpful list of questions to get you started:
- What type of property are you purchasing?
- Has the property been constructed yet?
- How much can you afford with you cash and CPF savings?
- Do you have other loans to consider?
- What will your monthly payments be?
- How risk averse are you?
1. What Type of Property Are You Purchasing?
This might seem like a basic question, but it is a helpful starting point nonetheless.
If you are looking to purchase an Housing Development Board (HDB) property, be it a new Build-to-Order (BTO) or resale flat, you can choose between an HDB loan and a bank loan. Read about the differences between HDB and bank loans here.
If you’re buying private properties like a condominium unit or landed house, you are eligible only for bank loans.
Executive Condominiums (EC), a hybrid of the two, is the “exception” to above. ECs are developed and sold by private developers, but under HDB rules. So while they begin their life as public housing, they phase into private property after 10 years. EC buyers are eligible only for bank loans.
2. Has the Property Been Constructed Yet?
If you’re purchasing a resale home, then things are pretty straightforward as they’re already fully built and completed. If you’re eyeing an uncompleted property – also known as a building under construction (BUC) – then things are a little different.
For BUC private properties that have not yet obtained its Temporary Occupation Permit (TOP), your home loan needs to be repaid according to the Progressive Payment Scheme (PPS). The PPS allows home buyers to pay for the property progressively as the construction project reaches various milestones. Every time a specific milestone of the construction is complete, the developer will call for progressive payments corresponding to these milestones, and this carries on until the entire project is complete. If the home buyer has taken a loan, the drawdown may be paid by the bank, and not the home buyer.
For uncompleted HDB flats – i.e. BTO flats that will take a few years to complete – there is what’s called the Staggered Downpayment Scheme. Instead of having to pay the entire down payment upfront, you can instead opt to split it into two payments. There are some eligibility requirements that must be met, so please check if you qualify first.
3. How Much Can You Afford with Your Cash and CPF Savings?
Before taking out a home loan, you’ll need to figure out how much savings you have on hand and in your Central Provident Fund (CPF) Ordinary Account. The total amount you have will help determine how much down payment you can afford, as well as whether you should get a loan from a bank or HDB itself.
The loan-to-value (LTV) ratio is a cap on the amount that home buyers are allowed to borrow to finance their homes. For HDB loans, you can borrow up to 90% of the property value, which means that the minimum downpayment is 10%. For bank loans, you are only allowed to borrow up to 75% of the property value or purchase price (whichever is lower) for your first loan, which means that the minimum down payment is 25%, with at least 5% being paid in cash.
In short, if you have a substantial amount of cash and CPF savings, you can afford to make a larger downpayment and, in turn, borrow less for your mortgage. On the other hand, if you do not have quite as much cash on hand, it is advisable to stick with a smaller down payment and cover the rest a home loan that best fits your financial circumstance.
4. Do You Have Other Loans to Consider?
Aside from the amount of money you are allowed to borrow (in the form of LTV ratio), the government also regulates how much of your gross monthly income can go towards paying off your loans.
First, there is the mortgage servicing ratio (MSR), which refers to the portion of a borrower’s gross monthly income that goes towards repaying your HDB home loan. MSR is currently capped at 30% of a borrower’s gross monthly income, and is applicable only for HDB flats and new ECs (and not private properties).
Second, there is total debt servicing ratio (TDSR), which refers to the portion of a borrower’s gross monthly income that goes towards repaying monthly debt obligations, including property loans, the loan being applied for, and unsecured obligations such as credit card repayments. The current TDSR limit is 60% and below of the borrower’s gross monthly income. TDSR is applicable for all property purchases, be it HDB or private.
5. What Will Your Monthly Mortgage Repayments be?
With the amount borrowed, interest rate and loan tenure, it’s easy to work out how much your monthly instalment will be. Here are two examples:
For a HDB flat (with HDB loan):
Let’s assume that your HDB flat costs $400,000, and you opt for an HDB loan at an interest rate of 2.6% for a loan tenure of 25 years. The LTV ratio of an HDB loan is capped at 90% of the property value, so say you’re eligible to obtain a loan amount of $360,000. Based on these parameters, your monthly repayment is going to be $1,633.21. The CPF Board has a calculator to help you work out the math. It is also possible to finance your HDB flat purchase with a bank loan which allows for an LTV of up to 75% and typically lower interest rates.
For a condo:
Let’s assume that your condominium costs $1.3 million, and you opt for a bank loan at an interest rate of 1.5% for a loan tenure of 25 years. Since the LTV ratio of a bank loan is capped at 75% of the property value, you decide to obtain a loan amount of $975,000. Based on these parameters, your monthly repayment is going to be $3,899.38.
6. How Risk Averse Are You?
For example, if you dislike taking risks and prefer predictable monthly repayments, you can opt for a loan with fixed interest rate. A fixed rate loan applies the same agreed-upon rate throughout the contractual period, which is usually up to five years. After that, it reverts to a floating rate, but you can refinance to another fixed-rate package for a few years again.
So, if you signed up for a fixed rate package at 1.8% per annum for three years, then the interest rate will remain the same for those three years. If you have an HDB property you can also consider an HDB loan as the rate hasn’t changed in many years.
However, if you don’t mind taking some risks to potentially get a lower interest rate, you can opt for a loan with a floating interest rate. A floating rate loan features an interest rate that moves upwards and/or downwards based on a benchmark rate (like SIBOR, SORA and fixed deposit rates) throughout your contractual period. G
Conclusion: Home Loans Are More Than Just Interest Rates!
In conclusion, when choosing home loans, it’s more than just the interest rates and the amount of money you have on hand that home buyers need to consider. Taking into account the type of property you are purchasing, your CPF savings, the presence of other loans, and your risk appetite will ultimately lead to a smarter, more nuanced approach to your first property purchase.
For a start, why not try PropertyGuru’s mortgage comparison tool? Review home loans across major banks with the latest interest rates now.
Found some interesting options but need reassurance to commit to one mortgage option? The easiest way is to have a chat with our Home Finance Advisors, who can offer bespoke advice and recommendations based on your preferences and financial goals.
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