So we’ve written many articles before on important things to note during your home purchases. But every year, things change and we have different things to note when it comes to something as huge as buying a home. Here’s our 2017 guide on what’s important in your home loan:
The property you’re buying
Are you buying complete or uncompleted properties? You need to take note of specifics of the property you’re buying ‘cause these details do affect the terms of your home loan. An example would be uncompleted private properties, they’re considered a building under construction (BUC). These are usually only eligible for floating interest rate packages and doesn’t come with a lock-in period. The type of property you’re purchasing also affects the points we’re about to mention.
The MSR and TDSR in your Approval In-Principle (AIP)
The Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR): both regulations were introduced so we wouldn’t be borrowing more than we can afford. The TDSR caps all monthly debt obligations such as instalment plans, credit card bills, and bank mortgage repayment to make up 60% of the borrower’s monthly income. The MSR limits monthly repayments to loans granted for the purchase of HDB flats and ECs to a maximum of 30% of the borrower’s income.
A common misconception is that the MSR and TDSR are mutually exclusive things. They’re not. Although bank loans follow the TDSR for private properties and the 30% MSR for HDB resale flats, bank loans for resale HDB flats also have to fulfil the TDSR requirement. And oh, an EC is bought under HDB so it needs to follow the MSR and TDSR too.
Loan-to-Value Ratio (LTV)
“LTV? Wait so does MSR and TDSR and LTV come at the same time? Which one comes first? And so many!! Which one should I follow?” You think of these three terms and you liken them to how you can never find a balance between the women in your life.
There are so many ways the banks follow to determine the amount you can loan till you don’t even know the difference and functions of each one. Well that’s okay. Before you get your panties in a bunch, I’ll simplify things for you: the MSR and TDSR determines the MAXIMUM amount the banks are willing to loan you, the LTV determines how much of that maximum is applicable for the purchase of your house. So say a couple gets back their AIP from the bank at $800,000, at this stage the banks have already taken into account the TDSR and maybe the MSR (if you’re considering a resale HDB or an EC), their credit history, debt liabilities etc. If the couple decides to buy a resale HDB apartment for $600,000 and it’s their first home, their LTV is 80% and their final loan amount is $480,000 (80% of $600,000). $480,000 does not exceed the maximum amount of the $800,000 the bank is comfortable lending them.
Unlike HDB loans, where the minimum 10% downpayment can be paid fully via CPF, taking up bank loans would require a 20% downpayment with at least 5% paid in CASH. Yes, I emphasise the word “cash”. ‘Cause this cash deposit can’t be paid using your CPF. Hence, besides making sure you have enough in your CPF, getting a bank loan does require you to have a substantial amount of savings on hand. If you don’t, just go for HDB and their higher interest rates. Beggars can’t be choosers. In this current situation, you either get an HDB loan with a higher interest rate, or a bank loan where you’ll have nothing to pay the upfront. If you don’t even have enough in your CPF to finance your home buy with HDB’s loan, well no one can help you then. Don’t buy a house in this case.
Floating and fixed interest rates
Fixed interest rates are basically rates that are well, fixed by the bank for a set period of time. No points for guessing that correctly. It makes a good choice for the risk averse, especially in times when interest rates are threatening to rise. But if you need to decide between a floating interest rate and a fixed one, do understand that fixed interest rates are higher than floating rates. In that sense, you’re paying a premium for the stability.
Floating rates such as the SIBOR or SOR on the other hand, are rates which fluctuate daily based on market conditions. That means the rates can go higher or lower than fixed rates, depending on the economy. But since the US federal rates have increased, it’s high chance that SIBOR rates will go higher so it’s probably not a good idea to get SIBOR now. With ANZ’s retail banking being taken over by DBS, banks in Singapore no longer use the SOR system anymore and board rates are just evil waiting to be unleashed. But before you start running off to Timbuktu…Don’t worry, we still have the fixed deposit-linked rates.
With fixed deposit linked rates, you get to pay a generally lower amount than fixed rate packages while enjoying a similar stability of rates. Although fixed deposit-linked rates are not entirely set in stone like that of fixed rates, they’re more predictable than SIBOR rates as the bank is basically giving you the same interest rate they give out for their fixed deposit accounts. So in a way the bank cannot anyhow come la.
What do you know: we really can get the best out of both worlds!
So what kind of home loan package should I get?
But alright, everything has their pros and cons. With all that’s said, the banks ultimately have the right to change the T&Cs. So it’s best you get a home loan package that best suits your CURRENT needs. In the end this article is just meant to guide you, everyone has different needs and preferences, whatever floats your boat you know?
Otherwise, if you have trouble deciding what’s best, let our friendly mortgage specialists give you a call! They’ll be more than happy to help!
What do you think is in-store for us property buyers this year? Let us know in the comments!