Do you want to own a home or are you actively looking to invest in a new condominium project in Singapore? Well, you may encounter a lot of jargon, and acronyms like HDB, SOR, SIBOR, MAS, and TDSR. So, what do all these mean? Fear not, herein I will break down the terms, step-by-step. In the end, you will know the cons and pros of the two major home loans in Singapore. It is an all-inclusive guide, but very simple. Let us do this!
How to Buy a Loan in Singapore
Singapore is the most expensive city in the world. For buyers, this is terrible news. Inevitably, you will need someone to give you cash for the purchase. That someone could be bank loans or HDB loans. You are familiar with banks. However, what is the HDB loan?
HDBs loans are Singaporeans’ gift from the Housing & Development Board. HDB loans have an interest rate of 2.6 percent. It has not changed for the past 15 years. Let us, not call them gifts yet, because they require sizeable financial commitment. Besides, they have restrictions. To qualify or receive the HLE (Housing Loan Eligibility) letter you must:
● One buyer must be a citizen
● An applicant cannot take two HDB concessionary loans in their lifetime
● Income not to exceed $12,000 for families, $18,000 for extended families
● Singles income cap is $6,000, for 5-roomed or small resale flat, or 2-bedroom new flats in non-mature estates under SSC.
● Buyer must not have owned or resold private residential property within the past 30 months
● click HERE to find more requirements
Before acquiring the loan, you need to pay a down payment of 10 percent. You cannot take the loan to purchase private property, you can only use it on buying HDB flats new or resale. Applicants who have already used two HDB concessionary loans can qualify for another one. In this case, the interest rate increases to 3.3% which is the non-concessionary rate. You can pay with your CPF. Finally, the loans come with few clauses. In case of problems such as late payments, it is easy to negotiate.
Bank Mortgage Loans
Not every Singaporean chooses or qualifies for the HDB loans. Fortunately, Singapore has about 17 banks ready to offer mortgage loans.
What Are Mortgage Loans?
Banks can finance your purchase. Simply put, they pay for the private property. With the seller off, enjoying their profits, who remains? You and the bank. For the next coming years, you will pay for the loan slowly, at principal + interest. In the end, the bank and its shareholders, make their profits. Mortgage loans may seem simple, but they are complicated. Let us break them down.
Interest Rate Types
The single focus of mortgage loans is the interest rate. Based on the rates, loans fall into two categories: Fixed or Variable interest rates. Variable rates change periodically, unlike the stable HBD loans at 2.6 percent. You might ask; how do banks determine the variable rates?
In Singapore, all banks offering mortgage loans use the same rates, which are two:
● Singapore Interbank Offered Rate (SIBOR)
● Swap Offer Rate (SOP)
To explain the SIBOR consider the following scenario:
Suppose you need $20 right now. You might go to your family member to get the cash. After your paycheck, you pay them back the money. Banks also lend money to each other. Although, while you may not pay interest to a family member, banks pay interests to each other.
Since there is need to have order, the Association of Banks in Singapore (ABS) comes up with one rate, used for each business day of trading. Each bank will submit their rate for the day. ABS takes removes the highest rate and lowest rate, and averages the rest. You can find the rate in Newspapers or on ABS’s website.
Over the years, the SIBOR has varied. In 2006, the rate was close to 4%. However, it kept on dropping progressively. As of 2015, the rate had fallen to 1.3%. The rate varied, rising to 1.6%, and falling again.
SOR is similar to the SIBOR and is reliant on foreign exchange fluctuations. Distinctly, the Singapore Dollar –US Dollar exchange rate.
Most banks base their loans on a 3-Month SIBOR. There is a catch though. Banks add a premium on top of the variable rate. For instance, if the 3-Month SIBOR is 1.3% they add 0.7% premium.
Why is the premium necessary? Banks may go to someone to get the money to pay for your property. The premium is the profit they will make after they pay back the money they owe plus the SIBOR.
When you go to the bank, SIBOR packages may look like this: Sample of SIBOR Package:
● Year 1: 3-Month Sibor + 0.65%
● Year 2: 3-Month Sibor + 0.75%
● Year 3: 3-Month Sibor + 0.85%
● Year 4 and onwards: 3-Month Sibor + 1.15%
As you can see, determining the total amount of loan you are going to pay is impossible unless, you can predict the future. Sometimes this loan option may end up being cheaper than other financing option. However, there is uncertainty about the stability of the SIBOR.
Which Should I Choose? SIBOR or SOR
Most banks will offer lenders SIBOR, and a limited number will base variable loans on the SOR. Between the two rates, SIBOR is the most stable, thus most preferred. On the other hand, SOR has been lower in past few months. Usually, when the SOR goes up, the SIBOR rates decrease. If you need stability, you can opt for fixed interest loans.
Fixed-Deposit Mortgage Rate (FDMR)
FDMR is an in-house bank rate. That means the rate is free from market influence. They use this interest rate, which surpassingly should be more stable than SIBOR rate.
Banks derive the FDMR rate from the fixed-deposit interest rate offered to customers who open fixed accounts at the bank. Simply put, the banks pay these customers dividends for depositing money. So technically, whatever the FDMR rate that is charged to the mortgagee will go to the consumer who has the fixed deposit account or savings account. By doing this, banks promote transparency.
Some banks have variable board rates. These rates are also, bank-defined. However, the process of coming up with the rates is not open to the outside world. It remains a secret. Despite the layer of secrecy, the rate is relatively stable compared to the SIBOR or SOR rates.
How Singapore Controls the Mortgage Lending Market
Think of a situation, where people borrow without restrictions. It actually happened in the US, leading to the 2007 financial crisis. People who could not repay loans qualified for mortgages, nonetheless. In some situation, even taking on more than one mortgage. The loans were highly rated despite being high risk, and the tale goes on.
Singapore does not desire to have such as a problem in the country. In 2013, the Monetary Authority of Singapore (MAS) introduced the Total Debt Servicing Ratio (TDSR). Of course, financial institutions had sound policies in place to assess if a person could qualify for a specific loan amount.
They determined the amount of money you could borrow using the Loan-to-value ratio. However, after studying the policies and procedures, MAS, saw it fit to introduce the Total Debt Servicing Ratio (TDSR).
The TDSR framework applies to all kinds of private property purchases. Financial institutions typically use the TRSR, when the buyer has other debt obligations, for instance, car loans or credit card loans. In addition, if they have a variable income.
Let us break it down, further and even look at examples of real-world computations. When computing the Total Debt Service Ratio (TDSR) banks consider the following:
Monthly repayments of the mortgage loan
- Prevailing interest rate
- Haircut of 30 percent applied to variable income
- Only 60% of the buyer’s income can service the loan. MAS require strict conformity to this rule.
- Any outstanding debts or loans being serviced by the buyer
Example of 60% TDSR
Consider the following:
1. Adrian has a monthly income of $8,000 per month. He has to pay $1,000 for a car loan and another $1,000 for a personal loan.
2. Jennifer earns $10,000, but 30% of the income is variable. She is not assured of earning this full amount.
Adrian and Jennifer want to take a mortgage loan to finance their first private property. For the 60% TDSR, we have:
If both buyers were aiming for the same house, worth $800,000, of course, Jennifer would have more bargaining power. She has more than enough to pay for the home.
Let us suppose that she decides to forgo the home and opt for a more expensive one. How can Adrian acquire the property?
Adrian can obtain an estimated loan amount of $599,302. However, the house purchase price is $800,000. All banks in Singapore only allow maximum loan of 80% of the purchase price or valuation amount whichever is lower, the balance amount will be the down payment of 20%, which minimum 5% must be in cash and 15% must be in CPF or cash. Let’s round down the loan figure for Adrian to $599,000 for easier illustration. Therefore, he will use $599,000 bank loan which is below 80%, which also because that is the maximum loan amount he can obtain based on his income. He will have to pay the balance of $201,000 which is a 25% down payment instead of the standard 20%..
Note: If you are wondering how the figures magically appeared, worry not. You can use a mortgage loan calculator to find the values. It only takes a few seconds. You can do your own calculation by using our mortgage loan calculator HERE.
Things to Avoid When Applying for Bank Loan
Banks do not like one thing, and that is taking risks. As much as banks love making a buck, they evaluate each applicant to determine their creditworthiness. If they find uncertainties, they will shun you. Everyone wishes to be approved, and here are some helpful suggestions.
First, ensure that you know your credit score, which banks use most of the time. You can check your credit rating via Credit Bureau Singapore: http://www.creditbureau.com.sg/the-available-options-to-obtain-your-credit-report
Before and during the application for mortgages in Singapore, here is a list of tips to follow:
● Do not have many lines of credit open and make debt payments on time.
● If you are planning to buy a house, do not take a car loan if you do not have one yet. Settle the buying of the house first.
● Clear any other loans you might have, but at least have a history of debt for the bank to use as a reference.
● Do not change jobs until you have settled the purchase, as changing job is a sign of uncertainty to the bank and it will affect the loan approval figure.
Correcting a Bad Credit Score
Due to past circumstances, you might have a bad credit rating. Do not worry you can correct and improve this score to qualify for loans in the future. You can improve the score by meeting up with past lenders and working out a repayment plan.
Make sure you are not late for any payments. In addition, follow up with the Credit Bureau to make sure they have accurate information regarding your past debts.
Bottom Line: SOR, SIBOR, and FDMR
To conclude, when you ponder over the package to take, consider the uncertainty of the interest rates. Always, the best option is the one that is cheap and stable. I only hope that you can choose wisely. If you need more personalised advice and consultation, you can contact me or my team via the enquiry form.
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