Home Loans: Laying a Good Foundation
Many people dream of owning their own home. No more catering to a landlord’s wishes! Let’s paint the walls bright pink! Make good on an original design idea and knock down the wall between the kitchen and dining room!
It all sounds exciting, but remember that a house may be the most expensive acquisition that most of us will make in our lifetime. Purchasing your dream home will likely require financing since most people don’t have that level of cash required to pay for a house outright.
A home loan or mortgage allows you to borrow money to pay for the residential property. Properties that qualify for home loans include HDB flats, private properties that already exist and private properties that are still under construction.
Before you decide to take out a home loan, assess your financial standing. How much can you afford to make a down-payment on the house? How much do you need to borrow? How much are you eligible to borrow?
Research and compare the loans offered by various banks and financial institutions. The details of a repayment plan for a home loan generally depend on the loan principal, loan repayment period, interest rate and any other fees that the bank may charge.
- Loan Principal
In general, local banks will usually allow you to borrow up to 80% of the property value. Take note that the property value used by the bank to calculate the loan principal is the lower value of your purchase price and the bank’s internal valuation.
This means that if your purchase price is higher than their internal valuation, you will have to shell out cash for the price difference. As such, it is a good practice to request valuation and an “in-principle” approval from the bank before actually buying a property.
Aside from the property value, your ability to pay back the home loan is also taken into consideration when calculating the approved loan principal. Banks usually set a figure between 35 and 50% as their maximum ceiling for the debt service ratio.
To calculate this ratio, banks add up the monthly payments for all your long-term liabilities (including the potential home loan) and divide the sum by your monthly income. If you do qualify for a large loan principal, ensure before finalising the loan that you will have the capacity to pay it back.
- Loan Repayment Period
The loan repayment period will typically range between 10 to 35 years. As with other loans, a longer loan repayment period means a smaller monthly instalment, but a higher total amount of interest paid at the end of the day.
A limiting factor to your loan repayment period is your age. Most banks cap the maximum term to end at 65 years of age. This means that if you are 40 years old, then you may get approval only for a loan repayment period up to 25 years, rather than 35.
The loan repayment period that you choose may also affect your loan principal, specifically the percentage of the property value that you are able to borrow. To be eligible for the maximum loan amount in Singapore, your loan repayment period must be 30 years or less for private properties and ECs, and 25 years or less for HDB flats.
- Interest Rate
When shopping for a home loan, you’ll have to decide to get either a fixed interest rate or a floating interest rate. With a fixed-rate loan, the interest level is maintained during the first part of your repayment period, generally between 1 and 5 years. A fixed-rate loan can be a good option if interest rates are low at the time you take out the loan. Even if the prevailing interest rates increase, the interest that you pay on that loan will remain unaffected.
With a floating-rate loan, the interest rate can be modified by the bank on a daily basis. The variable rate is benchmarked against the bank’s Internal Board Rate (IBR), the Singapore Interbank Offered Rate (SIBOR) or the Swap Offer Rate (SOR). Unlike the IBR, the SIBOR and SOR can be monitored by the public through Bloomberg and other websites. In general, a floating-rate loan initially charges a lower interest rate.
Later in the term, however, the interest rate will be determined by the movement of the IBR, SIBOR or SOR. As a result, a floating-rate interest level may rise above or drop below any given fixed rate.
A lot of loans may already include several subsidies for valuation, legal and fire insurance fees. Make sure to check the amount for each subsidy when comparing loans from different banks.
- Lock-in Period
A loan with a shorter lock-in period typically has a higher interest rate. If you repay the loan within this period, you will have to pay a penalty which can range from 0.75 to 1.5%.
However, if you terminate the loan due to the sale of the house, the bank may waive this penalty. Make sure you have a clear understanding of the lock-in period and bank penalties before signing any loan documents.
Here are some other things you need to understand before you take out a home loan.Recommend0 recommendationsPublished in