2023 Mortgage Selection: Your One-Year Financial Planning Guide

Whether you plan to buy a new home or already own a property in Singapore, you should seriously consider how to choose your mortgage in 2023. The era of near-zero market interest rates is over: in 2022, global interest rates rose sharply, and Singapore’s home loan rates also increased significantly, currently hovering between 3.8% and 4.5%. Given that property prices in Singapore are at least six figures, understanding matters related to home loans is crucial.

For many, finding the right mortgage is difficult. Besides comparing interest rates between different home loan packages, you also need to consider other factors, such as how much you can borrow from HDB or a bank based on your Loan-to-Value (LTV) limit and Total Debt Servicing Ratio (TDSR), and whether to use your Central Provident Fund (CPF) to repay your mortgage (and if so, how much?)

Disclaimer: In Singapore, there is no one-size-fits-all “best” mortgage. Instead of choosing a randomly found low-interest rate mortgage or thoughtlessly opting for a heavily marketed one, we recommend that you filter based on your financial situation and personal preferences. In 2023, no matter how new you are to the topic of choosing a mortgage, we have prepared a guide for you, aimed at helping you on your property purchase or refinancing journey in Singapore, so you can find the “best” mortgage for you this year.

What is a Mortgage? (Definition, Meaning, Process)

This section is for those who are completely unfamiliar with mortgages. If you already have a mortgage or are familiar with how to take out a loan to buy a home in Singapore, please skip to the next section of this article.

A mortgage is a loan that can be used to purchase property and land. It is one of the quicker and most common ways to buy a home in Singapore without having to pay the full price in cash upfront. The terms “Mortgage” and “Home Loan” are often used interchangeably.

The 4 Components of a Mortgage

1. Loan Amount

This is the amount the lender can loan you. In Singapore, lenders are primarily HDB or banks. The loan amount can be up to 80% (HDB loan) or 75% (bank loan) of the property’s price or value. By law, you cannot take a full loan, i.e., 100% of the property price.

2. Down Payment

This is the amount you need to pay upfront for your property, usually the portion not covered by your mortgage. Depending on the type of property you purchase, you may be able to use your CPF to cover the down payment. The down payment is typically 20% to 25% of the property’s purchase price or value.

3. Mortgage Interest Rate

This is the interest rate on the loan you take from a bank or HDB to purchase a property. There are many different types of mortgage packages, but the most common are linked to fixed or floating rates. This determines how much interest you will incur (i.e., the money you need to repay the lender in addition to the principal).

4. Loan Tenure

This is the duration of your loan (i.e., the number of years you have to repay it). In Singapore, the maximum loan tenure can be up to 30 years (for HDB flats) or 35 years (for private properties). If you find that your current loan tenure does not suit your needs, you can consider refinancing to renegotiate the terms of your loan.

5 Factors to Consider When Choosing a Mortgage in Singapore

⚠️Reminder: The best mortgage for you may not be the best for someone else. Everyone has different mortgage goals, financial situations, and preferences. Therefore, everyone may consider different factors and risks when searching for the best mortgage for themselves.

When comparing different mortgages, homebuyers should focus on the following common factors. 

1. Loan at the Lowest Interest Rate

If you are looking for a mortgage with the lowest interest rate, here’s some good news: there are many different mortgages available in Singapore, and their interest rates can vary significantly. Coupled with the fact that market rates are constantly fluctuating, making the right choice can save you tens of thousands of dollars.

⚠️Note: Be cautious when you read or hear about “lower” interest rates. “Lower” can refer to the upfront, recent, or long-term rate. Although a mortgage may have a “lower” interest rate at the initial borrowing, it can be tied to a floating rate (which fluctuates with benchmarks like SORA) or a fixed rate (which promises to remain fixed for several years before converting to a floating rate). This means that what is “low” now may not stay “low” forever.

2. How Often You Monitor Mortgage-Related Information

Typically, you need to balance the monetary cost of applying for a mortgage with the effort you put into it. Simply put, if you want to consistently enjoy the lowest interest rates and pay the least amount of interest, you will inevitably have to invest more effort in monitoring mortgage-related information.

If ensuring the lowest interest rate is your goal, then you need to ask yourself how often you plan to refinance your home. After your loan’s lock-in period (usually one to three years) ends, interest costs tend to soar. At the same time, refinancing loan rates are often the most competitive on the market.

However, refinancing requires the homeowner to be proactive. You need to constantly monitor when you are eligible to refinance without a penalty (i.e., after your lock-in period), compare the latest packages on the market, and apply for them. For some, this extra effort can be well worth it.

Another important factor to note when you seek to refinance is the additional costs involved, such as legal and valuation fees. Most of the time, these costs are reduced by subsidies offered by banks, but such subsidies are seasonal and not always available.

3. Paying Off the Mortgage as Soon as Possible

Many homeowners who are not concerned about monthly cash flow often aim to get out of debt as quickly as possible, striving to reduce the total cost over the entire loan period and minimize the amount of interest they pay in the long run.

If you fall into this category, a mortgage that balances a low interest rate, a short loan tenure, and no extra fees for early repayment will be the best for you.

A “low” interest rate varies depending on your goals and circumstances. It could be a long-term low rate (if you plan to keep the mortgage) or a short-term low rate (if you plan to refinance in a few years).

Furthermore, reducing the number of mortgage installments, in other words, shortening the loan tenure, is one of the best ways to maintain a low interest rate. A shorter mortgage term means less interest paid and a larger portion of the monthly payment goes towards repaying the principal. However, a shorter loan tenure means higher monthly payments, so make sure you can afford it. If you choose a shorter loan tenure from the start, you can use each refinancing cycle as an opportunity to review your remaining loan term.

Besides your loan tenure, another effective way to reduce the amount you repay and shorten the loan term is to make early repayments to pay down part of the principal whenever you have spare cash. Some banks and lenders charge for early repayments as it may affect their potential interest earnings. Therefore, if your goal is to reduce the total mortgage amount and you have the ability to make early repayments, you should look for a mortgage that does not charge for them.

Finding a mortgage that meets specific requirements can be difficult. To find it faster and more easily, let those who know all the mortgages on the market, like the mortgage experts at Anjia SG, help you. Let experienced professionals recommend the most suitable home loan for you.

4. Building an Emergency Fund

This isn’t a pessimistic attitude, but considering the current economic outlook—with rising inflation and slowing economic growth—it is perfectly reasonable to prepare for a rainy day.

Applying for a mortgage is a major commitment. When choosing a loan, you should consider how you might be affected if something unexpected happens, such as losing your job and having no income for several months.

The most direct help to get you through tough times is your savings—especially the savings in your CPF Ordinary Account (OA). The funds in your CPF OA grow at a rate of 2.5% per year, which is a considerable rate.

If this is your preference, then build up your CPF savings as much as possible and only use them when necessary. You can do this by paying more in cash each month, thus leaving more money in your CPF.

5. Getting the Lowest Monthly Mortgage Payment

Due to the nature of property ownership in Singapore, most young couples face significant financial pressure at the beginning of their marriage. This often leaves them financially strained, forcing them to choose a mortgage plan with the lowest monthly payment.

If you are in this situation, you will want to look for a loan package that offers the longest possible tenure to spread out the payments over time, thereby reducing the monthly installment.

In the short term, this will place you within a favorable TDSR (Total Debt Servicing Ratio) range, making monthly repayments more manageable. However, keep in mind that you will be charged interest over a longer period, and in the long run, you may end up paying more interest.

You need to consider your age and income (and your partner’s) when applying for a mortgage. The older you are, the less flexibility you have with the loan tenure, as your LTV (Loan-to-Value) limit will be reduced if you intend to extend the loan tenure beyond age 55.

Adding a younger person as a joint borrower might help in calculating the average age of the borrowers. However, this is only helpful if the joint borrower also has an income to provide the necessary weight. The joint borrower also needs to have their name on the property title to be considered. This is not feasible for most homeowners, so it is best to plan ahead to avoid such tricky situations.

How to Find the Best Mortgage in Singapore (2023)

Although loan interest rates were high at the beginning of 2023, experts expect them to moderate in the second half of the year. You can find more details in our “2023 Singapore Property Market Outlook” report. High interest rates will not last forever, and with proper planning and the right guidance, it is possible to navigate this period. After all, a mortgage spans decades. It’s more like a marathon than a sprint.

In this situation, we recommend following the advice of Anjia SG’s mortgage experts to help you make the best decision and assist with the necessary applications to ensure a successful loan.

By working with our loan experts, you remain in control of the entire mortgage application process while benefiting from the expertise of seasoned professionals. We consider your short-term and long-term goals, as well as any future refinancing or selling decisions you might have, to help you find the best path and generate the optimal solution for your unique situation. Planning not just for now, but for the future, is what professionals do best. We recommend making full use of their talents to ensure a stronger financial future for yourself.

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