For the average person, buying a property will most likely be the most costly purchase in their lifetime and will have to be largely financed by a loan or mortgage - unless you belong to the top 1% with upwards of 7 digits sitting in your bank account as we speak.
Today we go over the basics of getting a mortgage loan - in light of the harsh interest rate environment that the property market is currently in.
Overview
There are 2 main types of mortgage loans that you can take in Singapore - loans given out by the Housing Development Board (HDB) or those given out by banks.
In a self-explanatory manner, HDB loans only apply for those looking to purchase a HDB flat, not private property. While HDB loans are great value, there are a few criteria that potential loanees have to meet to qualify for one.
To be eligible for a HDB loan, one must meet the household income ceiling set by the HDB. $14,000 and $21,000 for families and extended families respectively, $7,000 for singles.
One must not own any local or overseas private residential property in the last 30 months.
Those who are eligible for HDB loans get to enjoy borrowing up to 90% of the property value, in contrast to the 75% provided by bank loans. This is also known as the loan to value ratio (LTV). Opting for a HDB loan allows one to pay less upfront cash, instead being able to spend this money on renovation or other transaction fees.
In addition to this, HDB loans also offer a much more competitive interest rate as compared to bank loans. Since HDB is a government organisation, they can offer a 2.6% P.A. interest rate as compared to banks which have to offer upwards of 4-4.5% interest to stay competitive with the rising interest rates imposed by western financial institutions.
Bank Loans
When obtaining a loan from a bank, you have the option to select either their fixed-rate or floating-rate packages.
When securing a home loan, you can choose between two main types: Fixed Interest Rates or Floating Interest Rates.
A fixed interest rate typically comes at a slightly higher cost due to its stability over a set duration. Opting for a fixed-rate loan ensures consistent monthly payments throughout the designated period.
Conversely, a floating interest rate varies in line with benchmark rates. Floating rates are usually slightly lower than fixed rates, and any alterations in the interest rate can lead to corresponding changes in your monthly payments.
Certain banks offer fixed interest rates starting as low as 1.15%, while floating interest rates begin at 0.92%. These rates stand significantly below the prevailing HDB rate of 2.6%. This discrepancy could yield substantial savings, particularly for sizable loan amounts.
Loan Tenure
The HDB housing loan has a maximum loan term of 25 years, whereas bank loans usually extend until the borrower reaches the age of 65.
For instance, if you're 30 years old, you could potentially secure a loan term of 35 years.
Nevertheless, it's important to consider that an extended loan term results in increased interest payments, even though your monthly instalments will be smaller.
It's recommended to assess your financial situation and determine whether a longer loan term aligns with your needs or if opting for smaller monthly payments is more suitable for your circumstances.
Whether this is your first time trying to acquire a mortgage loan or maybe you have not been active in the property market for years - given the rapidly evolving nature and climate of Singapore’s property market and economy, it is always good to be in the know-how about the latest policies and limitations!
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