Singapore Home Loans & Mortgage Guide: Everything You Need to Know

The Federal Reserve is expected to approve another significant interest rate hike at its meeting next month, causing major disruptions to global capital flows. Countries have successively introduced major policies to stabilize their property markets, with cooling and regulation becoming the main trends in popular home-buying destinations.

Singapore’s real estate has consistently been a popular property market in recent years. With the series of property cooling measures announced by Singapore last month (September 29, 2022), how should investors and owner-occupiers make reasonable use of leverage to purchase property?

This article will provide you with information about getting a home loan in Singapore.

I. Can foreigners get a loan to buy property in Singapore?

Yes! Anyone can get a loan to buy property in Singapore.

According to relevant Singapore government regulations, foreigners can apply for a home purchase loan. They can borrow up to 75% of the total property price.

Globally, Singapore’s loan interest rates are very low. Currently, Singapore’s mortgage rates are between 3% ~ 4%.

When processing a loan, the bank will comprehensively assess the buyer’s income, assets, job, age, and credit history. Salaried employees, self-employed individuals, and even those who are not working can apply. Even investors who do not live in Singapore can apply.

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II. Why apply for a loan when buying a house in Singapore? Is it cost-effective?

Singapore’s payment model for new launch properties (uncompleted properties) is very different from other countries. All local developers in Singapore must strictly adhere to the Housing Developers Rules, and the sales and payment process for new launches is strictly regulated.

Are you still worried that the developer might run off with your money after you buy an uncompleted property? Your payments are held in a Project Bank Account, and the developer cannot withdraw them freely. The developer can only access the funds for each stage of construction after it has been completed and inspected. If a buyer does not plan to apply for a loan, they still do not need to pay the full price at once. Payments are made according to the construction progress.

In Singapore, once the Sale and Purchase Agreement (S&P) is signed, the buyer is officially the owner. After paying the 25% down payment, the remaining balance is paid progressively according to the construction schedule. If you have a bank loan, the bank will also disburse the loan according to the construction progress.

Assuming you purchase a new launch property for S$1 million, with a S$750,000 loan over 30 years. At current interest rates, the monthly installment will start from a few hundred Singapore dollars. After 6-9 months, once the foundation of the project is laid, the developer will notify the buyer to pay 10% of the property price.

Another 6-9 months later, when the building’s framework is completed, the buyer pays the next 10%.

After 3-6 months, when the walls are completed, the buyer pays 5%.

After 3-6 months, when the floors and ceilings are completed, the buyer pays 5%.

Another 3-6 months later, when the car park, estate roads, and other facilities are completed, the buyer pays 5%.

Another 3-6 months later, when the floors and ceilings are completed, the buyer pays 5%.

Another 3-6 months later, when doors, windows, electrical wiring, and plumbing are completed, the buyer pays 5%.

When the entire project is completed and the Temporary Occupation Permit (TOP) is issued, the buyer collects the keys and pays 25%.

Finally, one year after moving in (this year is the developer’s warranty period), upon the buyer’s final inspection and acceptance, the final 15% is paid.

⚠️Note: The estimated timelines for different projects may vary, depending on the developer and construction progress.

The developer will clearly state the latest delivery date (TOP) in the sales contract, and construction delays are not common.

A key principle of wealth management is to save money by borrowing from the bank. Generally, the rental yield for Singapore property is around 3% to 5%, which is higher than bank interest rates. The rental income can typically cover the loan interest, maintenance fees, and other costs. Investors can also use leverage, using rent to service the loan, thereby increasing their investment returns.

The annual interest paid on a home loan can be used to deduct personal income tax incurred from rental income. In Singapore, if an investor stays for less than 183 days, they are subject to a personal income tax rate of up to 22%. Therefore, by using a home loan, the interest expense can offset almost half of the personal income tax liability.

III. When can I start applying for a loan?

When buying a property in Singapore, the most important first step is to know how much you can borrow. The loan amount determines your property price range. Determining a suitable budget before you start viewing numerous properties can save you a lot of time and effort.

The first step in getting a home loan from a bank is to obtain an In-Principle Approval (IPA) letter. The IPA is the bank’s assessment of your financial situation, informing you of how much you can borrow. The IPA will also provide you with various applicable loan packages.

Therefore, you can apply for an IPA from a bank before you are ready to make a purchase. Generally, an IPA is valid for 30 days, so be sure to time it correctly.

The process of applying for a home loan in Singapore:

1. After comparing packages from multiple banks, select a bank (it’s best to narrow it down to one or two);
2. Apply for your IPA;
3. The bank issues the IPA;
4. Choose your desired property and submit a loan application to the bank;
5. The bank conducts a valuation of the property;
6. The bank approves the loan application;
7. The bank informs the lawyer to prepare the relevant contracts;
8. The buyer signs the home loan agreement;
9. The lawyer registers the loan agreement;
10. The client pays other related fees to the bank and the outstanding balance to the developer;
11. The loan is disbursed;
12. The buyer makes monthly payments based on the disbursed loan amount and the agreed interest rate.

IV. What is the loan amount I can get?

In Singapore, the amount you can borrow is defined by a specific term—the Loan-to-Value (LTV) ratio.

According to the latest cooling measures implemented on July 6, 2018, you can apply for a loan of up to 75% for your first property, up to 45% for your second property, and up to 35% for your third property. The specific loan amount will be affected by your age and the age of the property.

For example, a 75% LTV ratio means you can borrow up to 75% of the property’s value (or purchase price, whichever is lower).

V. How much down payment and monthly installment do I need to prepare?

Purchase Price = Down Payment (5% cash + 20% cash and/or CPF OA) + Home Loan (up to 75% LTV)

How much is the down payment?

Generally speaking, let’s assume the property price is S$1 million, and the buyer’s age plus the loan tenure does not exceed 65 years.

⚠️Note: Suppose you want to buy a resale property valued at S$1 million. However, the seller’s asking price is S$1,015,000. The S$15,000 difference is known as Cash Over Valuation (COV). You can borrow a maximum of S$750,000 (75% LTV of S$1 million). You can then use up to S$200,000 from your CPF OA (20% of S$1 million) for the down payment, but the remaining S$65,000 (5% of S$1 million + COV) must be paid in cash.

💡Tip: You won’t encounter COV when purchasing a new launch property.

Your monthly repayment capacity also determines your loan amount

To prevent individuals from over-borrowing, the Monetary Authority of Singapore (MAS) established the TDSR framework to limit loans. This restriction targets your monthly repayment ability.

TDSR stands for Total Debt Servicing Ratio. As the name suggests, it means that your total monthly debt repayments—including home loans, car loans, credit card debt, student loans, and all other loans—cannot exceed 55% of your monthly income. Monthly income includes both fixed and variable income, such as bonuses, allowances, commissions, rental income, etc. For self-employed individuals, income is considered variable and, due to its instability, only 70% of the actual total amount is typically counted as monthly income when applying for a loan.

We recommend keeping your monthly loan payment at around 30% of your monthly income, and preferably not exceeding 50%. Otherwise, if cash flow issues arise, a forced sale of the property might be at a price below market value, resulting in a loss.

Loan Amount Stress Test

To ensure borrowers can sustainably repay their loans in the future, banks conduct a stress test. The government recently raised the interest rate used for this stress test in its property cooling measures announced on September 29, 2022. The Monetary Authority of Singapore (MAS) increased the medium-term interest rate floor used by private financial institutions to compute the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) by 0.5 percentage points, from 3.5% to 4%. For non-residential property loans, the medium-term interest rate floor was raised from 4.5% to 5%.

For example:

If a first-time private property buyer is under 35 years old (for those over 35, the loan tenure will be correspondingly shorter. For instance, a 40-year-old can only get a 25-year loan, and the amount will also be reduced accordingly.)

Assuming a total loan of S$100,000 over a 30-year tenure with a 4% interest rate, the monthly installment would be S$478.

To meet the 55% TDSR requirement mentioned above, the monthly income would need to be at least: S$478 / 55% = S$869.

In other words, a borrower under 35 with a monthly income of S$869 can get a maximum loan of S$100,000, which is approximately 115 times their monthly income.

Generally, buyers under 35 can use this multiplier of 115 times their salary to estimate their total loanable amount. So, how is it calculated for those over 35?

Let’s stick with the S$100,000 loan example. If the borrower is 40 years old, the loan tenure is only 25 years. Using the same 4% interest rate, the monthly installment would be S$528. Based on the 55% TDSR limit, the required monthly income would be over S$960, and the loan amount becomes 104 times the monthly income.

What if my monthly income is too low to get the loan amount I need?

For a first-time private property buyer under 35, buying a S$1 million property with a S$4,000 salary, you could probably get a loan of about S$460,000. According to the 75% LTV limit, the maximum loan is S$750,000, leaving a shortfall of S$290,000.

For this shortfall, a S$290,000 loan over 30 years would require a minimum monthly installment of S$1,384. This means a minimum monthly income of S$1,384 / 55% = S$2,516 is needed. The corresponding total income over 4 years would be S$120,768.

There are two ways to increase the loan amount for this portion.

• Pledge Loan: Place S$120,768 in a fixed deposit with the bank for 4 years (MAS requires the borrower to deposit an amount equivalent to 4 years of total income, based on the minimum monthly income needed for the loan, with the lending bank for 4 years).

Some might feel that locking up such a large sum of money for 4 years is too long. With Singapore’s low interest rates, besides tying up capital, you could miss out on significant earnings. In that case, you might consider an Unpledge loan. To put it simply, you just need to prove to the bank that you are wealthy. How much money does it take for the bank to believe you’re rich? Let’s go back to the S$100,000 loan amount. For a pledge loan, you need to deposit S$120,768 for 4 years. For an unpledge loan, you would need to show S$120,768 / 0.3 = S$402,560.

• Unpledge Loan: Deposit S$402,650 into a bank and provide a proof of deposit (to show you have sufficient funds to repay the loan. If you feel the amount is too high, there are ways to reduce it). The deposit period can be as short as a few weeks or as long as a few months, depending on whether you are buying a new launch or a resale property.

VI. Types of Singapore Home Loan Interest Rates

Many banks in Singapore can provide mortgage loans to home buyers. Generally, smaller or local banks tend to be more efficient, while larger banks may be slower. The key is to compare multiple banks to find the one with the lowest annual interest rate.

Banks That Offer Home Loans

As an overseas investor, you cannot purchase public housing in Singapore (i.e., HDB flats), and therefore cannot take a loan from the Housing & Development Board (HDB).

Common banks and financial institutions in Singapore where you can apply for a loan include:

1. Local Singapore Banks Offering Loans:

• UOB (United Overseas Bank)
• OCBC (Oversea-Chinese Banking Corporation)
• DBS (Development Bank of Singapore)
• Hong Leong Finance

2. Overseas Banks in Singapore Offering Loans:

• Standard Chartered
• Citibank
• HSBC
• Maybank
• CIMB
• RHB Bank

🤔 Personal opinion: You should try to choose local Singapore banks for your loan, not international ones. Because with loan restrictions in popular property markets worldwide, choosing an international bank could affect your loan conditions for future property investments in other countries due to your investment loan history.

By Package Type: Loans are categorized as Fixed Rate and Floating Rate

• A Fixed Rate loan means the interest rate remains unchanged throughout the repayment period. This helps avoid losses from future interest rate hikes, but if market rates fall, the borrower will end up paying more interest. Fixed rates are generally slightly higher than the prevailing floating rates in the market at the same time.
• A Floating Rate changes according to market interest rates (linked to the SORA rate). Banks can offer different home loan packages based on the borrower’s situation to meet their needs. Banks typically structure these packages as SORA + Spread = XXX%. SORA is the Singapore Overnight Rate Average.

The choice between a fixed or floating rate, in my opinion, depends on personal temperament. Conservative individuals should opt for a fixed rate for its stability and peace of mind, as you won’t have to worry about it for two or three years or constantly monitor rate changes. Those who are more proactive, adventurous, and have some understanding of and independent thoughts on financial policies can consider a floating rate.

However, for new condominiums that are still under construction (new launches), banks only offer floating rate packages, not fixed rates. There is usually a one-time free package switch service after the condominium is completed.

By Tenure: Loans can have a lock-in period or no lock-in period

A Lock-in Period refers to the effective duration of the loan package. If you need to prepay part or all of the home loan, refinance through the current or another bank, or even sell the property during the lock-in period, you may have to pay a penalty. If there’s a possibility of early repayment, you can request this when applying, as some bank packages may waive the penalty.

If you sign up for a loan package with a lock-in period, the bank will automatically switch you to a higher floating interest rate once the period ends. This would cause the owner to pay high interest. Therefore, it is generally advisable to start looking for better loan packages on the market within six months before the lock-in period expires.

Singapore only has one type of repayment model, which is “equal monthly installments.” This means that, assuming the interest rate remains constant, the monthly repayment amount for a Singapore home loan is the same every month. The principal portion of the payment increases over time, while the interest portion decreases. This means you are still paying interest even in the last month of your loan. If you want to make a partial prepayment, it will be applied directly to the principal, reducing it, and your next month’s repayment will be recalculated.

Too complicated?

Don’t worry, just contact our property experts, and we can provide you with comprehensive information and services tailored to your personal situation.

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