For most residents in Singapore, buying a home will be the most expensive single purchase of their lives. Although the property price curve has noticeably flattened since the early 90s and 00s, property prices in Singapore have generally continued to rise.
Today, even a simple three-room HDB flat will cost a buyer between S$300,000 and S$480,000. The prices for more spacious four- and five-room flats in mature estates can range from S$450,000 to over S$1 million.
If you plan to buy a private property, be prepared to double that price. The entry price for a condominium typically starts from S$1 million, while landed properties will cost at least several million dollars.
Therefore, if you plan to buy a property in Singapore, you will likely have to finance it through a home loan (also known as a mortgage).
In this article, we will explain what a home loan is, the different types of home loan packages, and everything else you need to know about financing your home purchase.
First, Can You Afford Your Dream Home?
For first-time homebuyers, calculating how much you can afford for a house can be complicated.
For convenience, seek the help of a professional real estate agent. They can help you estimate how much you can afford when choosing a property, which will save you more time.
Even if you can get a loan, the amount you can borrow depends on many factors—your salary, Loan-to-Value (LTV) ratio, Total Debt Servicing Ratio (TDSR), Mortgage Servicing Ratio (MSR), and more. We will cover these one by one.
Table of Contents
1) What is the Mortgage Servicing Ratio (MSR)?
The Mortgage Servicing Ratio (MSR) refers to the proportion of your gross monthly income that goes towards repaying your home loan. The MSR only applies to the purchase of HDB flats and Executive Condominiums (ECs).
The current MSR limit is 30%, which means that if you earn S$4,000 a month, only S$1,200 of your salary can be used to repay your mortgage.
While it may seem strict, this is actually a sensible approach to help ensure homebuyers only choose properties they can afford.
2) What about the Total Debt Servicing Ratio (TDSR)?
Many homebuyers ask if the MSR and the Total Debt Servicing Ratio (TDSR) are the same thing. The answer is no—the TDSR stipulates that only 55% of a borrower’s gross monthly income can be used for debt repayment.
These debt repayments include all your loans, including (but not limited to) your mortgage. Therefore, this means that if you have other outstanding loans (such as car loans, credit card debt, or personal loans), they will be counted towards this 55%.
As mentioned earlier, the MSR only applies to the purchase of HDB flats and ECs. If you are buying a private property, you only need to consider the TDSR.
3) Loan-to-Value Ratio (LTV)
The Loan-to-Value (LTV) ratio refers to the maximum amount a homebuyer can borrow, regardless of whether the loan is from the Housing & Development Board (HDB) or a bank. The LTV is implemented to prevent borrowers from over-leveraging.
For HDB Concessionary Loans, which are only applicable for the purchase of BTOs, Sale of Balance Flats (SBF), Re-offer of Balance Flats (ROF), and resale HDB flats, the maximum LTV is 80%. This means you can borrow up to 80% of the property’s valuation or purchase price, whichever is lower.
For bank loans, the maximum LTV limit for the first loan (i.e., no other outstanding home loans) is 75%. Of the remaining 25%, 5% must be paid in cash. The remaining 20% can be paid using a combination of cash and your CPF Ordinary Account (CPF-OA) savings.
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Types of Home Loans in Singapore
After you have decided on the property you want to buy, the next step is to decide how to finance it.
If you are buying an HDB flat, you can choose between an HDB concessionary loan or a bank loan.
If you are buying an Executive Condominium or a private property, you can only choose a bank loan.
One: HDB Loan
HDB offers housing loans to eligible buyers at a concessionary interest rate, which is 0.1% higher than the prevailing CPF interest rate. The current concessionary interest rate for HDB loans is maintained at 2.6% per annum.
Currently, the HDB loan interest rate is higher than the floating rates offered by most banks (more on this below). However, because the HDB loan has a maximum LTV of up to 80% (compared to 75% for private bank loans), its down payment is more affordable.
HDB Concessionary Loan Eligibility
To qualify for an HDB loan, at least one buyer must be a Singaporean citizen, and your average gross monthly household income must not exceed S$14,000. The full list of eligibility criteria can be found on HDB’s website.
Before applying for an HDB loan, you need to obtain an HDB Loan Eligibility (HLE) letter. As a financial planning tool, the HLE letter includes important information such as the maximum loan amount you can borrow, the maximum monthly repayment you can make, and your maximum loan tenure.
You can apply for the HLE letter online on HDB’s website. For a seamless application experience, it’s best to prepare electronic copies of your income documents in advance. Specifically, you will need your payslips for the last three months and your CPF contribution history for the last 15 months.
Once your loan eligibility is approved, the HLE letter is valid for six months from the date of issue—enough time for you to complete your HDB loan application.
Two: Bank Loan
Alternatively, you can consider getting a home loan from a bank or financial institution. (For buyers of private properties, you have no other choice!)
The main advantage of a bank loan is that in a low-interest environment, you may end up paying much less than with an HDB concessionary loan.
To reiterate, to enjoy this type of loan, you must be able to afford a 25% down payment (of which at least 5% must be cash). Assuming you are buying a S$1 million property, you will need a total down payment of S$250,000, of which S$50,000 must be paid in cash.
There are two main types of bank loan packages: fixed-rate loans and floating-rate loans. The agreed-upon interest rate is usually locked in for 2 to 3 years, after which it will revert to another rate determined by the bank.
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Fixed-Rate Bank Loans
As the name suggests, a fixed-rate home loan uses the same agreed-upon interest rate throughout the contract period. For example, if you sign up for a two-year fixed-rate package at 2.5% per annum, this rate will remain unchanged for the two years you are contracted for.
Floating-Rate Bank Loans
Floating-rate home loans are slightly different. The floating rate is pegged to an index and will move up and down with it. Generally, floating rates are considered more volatile, while fixed-rate packages are more stable.
The most popular type of floating-rate loan is the Singapore Overnight Rate Average (SORA) package, which will replace the Singapore Interbank Offered Rate (SIBOR).
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How to Apply for a Bank Home Loan
The first step to getting a home loan from a bank is to obtain an In-Principle Approval (IPA). An IPA is a conditional approval for your housing loan, indicating how much you can borrow from the bank and the various applicable loan packages, giving you a clearer idea of which properties are within your budget.
Once you decide to sign a loan package with a bank, you will receive a Letter of Offer (LO), which will list all important information such as the loan amount, interest rate, and lock-in period. With this Letter of Offer, you can then exercise the Option to Purchase (OTP) and proceed with buying the property.
Some common documents required for a bank loan application include:
• A copy of your NRIC
• Recent payslips (3 months)
• Recent Notice of Assessment (NOA) (2 years)
• Latest CPF Ordinary Account statement
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How to Choose the Best Home Loan for You
If you find negotiating home loans with banks one by one too time-consuming, let AnjiaSG help you.
We can provide you with a comprehensive list of the most favorable bank loan packages in Singapore and assist you in choosing the solution that best meets your needs.
For further enquiries, please get in touch:
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