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posted on 23 March 2016

Understanding Home Mortgage Financing In Singapore

The Singaporean home financing system can be difficult to understand at the best of times, due to the sheer amount of details that you need to consider when taking out a home loan. Hopefully, through this short guide, you will be able to understand what taking out a mortgage in Singapore entails, and what your options are.

LVR and MSR

The first thing you need to understand when evaluating a home loan in Singapore via sites like Property Guru is that the process is dependent on LVR (Loan-to-Value Ration) and MSR (Mortgage Servicing Ratio). Based on present day MAS (Monetary Authority of Singapore) regulations, the maximum LVR is 80 percent of a property's current value. Under this process, you need to pay the initial 20 percent cost of the property and only upon completion are you allowed to take out a bank loan for the remaining 80 percent. The reason behind this method of financing is to protect the Singaporean real estate market and banks from over-speculation, as well as to prevent buyers from attempting to purchase a property that they cannot reasonably afford. Calculating the capacity of a person to pay is based on the MSR, wherein the maximum allowed amount that a Singaporean citizen can pay is 30 percent of their monthly income. Utilizing both the LVR and MSR, a local buyer in Singapore can determine the potential monthly mortgage payments for a property, and whether or not they can afford it with their current level of MSR.

Financing Options

There are two financing options that you can choose from when taking out a mortgage in Singapore:

  • HDB Loans. An HDB loan is a state sponsored loan that has a far lower interest rate compared to many Singaporean banks. Done through Singapore's Central Provident Fund (CPF), the interest rate for the loan consists of the current CPF rate and an additional 0.1 percent that is payable within a ten to twenty-year period. Since a bank mortgage under a comparable period often reaches 15 percent or more, an HBD loan is an affordable option for people looking to purchase their first home or apartment.

  • Bank Loans. Bank loans are the second financing option when taking out a mortgage in Singapore and are utilized by people who perceive real estate as a long term investment for their retirement. Bank loans offer five to 20 year rates with varying interest rates; this depends on how many years to pay is indicated in the loan agreement. Determining the amount that the bank is willing to pay for your property is based on an IPA (In-Principal Approval) which allows you to examine the different interest rates and payment options available.

Bank Payments

If you're opting to utilize a bank loan instead of an HDB loan, there are two loan rates that you choose from:

  • Fixed Rate Loans. As its name indicates, this type of loan has a fixed rate that you and the bank agreed on during your loan negotiations. Regardless of fluctuations in home prices or the Singaporean market, the rate will remain the same. The advantage of this particular loan is if the MAS were to increase loan rates, or if the economy continues to expand resulting in the banks increasing the interest rates on their loans. The disadvantage of this method is if there is a decline in home prices, or if the economy contracts due to outside market forces, you will be forced to pay a much higher interest rate, as compared to someone who took out a loan during the period of market contraction. Lastly, fixed home rates have a higher interest rate, as compared to their floating rate counterparts.

  • Floating Rate Loans. Connected to the Singapore Inter Bank Offset Rate (SIBOR), floating rate loans are affected by present day market conditions. While they have very low-interest rates to entice potential home buyers, the fact remains that as market conditions improve, the interest rates tend to increase over time, resulting in you having to pay more than you originally thought. There is, of course, an advantage to choosing a floating rate, since you do pay less over time due to the lower interest payments. Some bank customers prefer having a set rate that doesn't change since this enables them to prepare a budget per month. People under a floating rate have to estimate their payments, and this can sometimes lead to moments of frustration where their monthly budgets are thrown into chaos because the amount to be paid keeps on changing.

Just remember, when taking out a loan, it's wise to only go for what you're absolutely certain you can afford. Yes, a house may look beautiful, and it would seem to be the most ideal for you - but if you can't afford it, then go for the next best alternative.

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