Choosing your dream home is the beginning of your happily ever after. The next step is picking the best loan to support that dream from the plethora of financing options in the market.
That home loan cornucopia can actually be a problem.
If you’re not knowledgeable in the world of finance, you’ll have a hard time sifting through those options. You’ll need to juggle with specialist terms like fixed or floating rate, lock-in period, tenure, and many more.
We have worse news: The perfect home loan doesn’t exist.
However, you can find suitable alternatives that fit you like a glove. But first, you need to be very clear on your needs and preferences. Let’s dive right in:
1. Home Loan Sum
Everyone who’s trying to get any loan wonders the same thing: “how much can I get?” Well, it depends on what home loan you’re choosing.
- HDB loan. The government grants this loan for its properties, and that’s why it has better conditions. One of those is that the HDB loan covers up to 90% of your future home’s value if you’re a first-time buyer.
- Bank/ licensed moneylender loan. A home loan at a bank or licensed moneylender in Singapore will cover just 75% of your apartment’s value for first-time buyers.
At this point, the obvious question is, why not choose an HDB home loan if it can get you a higher loan amount? Here are some possible answers:
- You’re purchasing private property, not a BTO flat.
- You have a larger down payment.
- You want a shorter loan term.
That said, other factors influence the total amount you can obtain:
TDSR and MSR
- TDSR: Total Debt Servicing Ratio aka the percentage from your monthly gross income represented by the totality of your loans
- MSR: Mortgage Servicing Ratio, aka the percentage from your monthly gross income represented by your home loans
Let’s say that you’re earning $6,000/ month and three loans each with a $1,000/month instalment: a car loan, an education loan, and a home loan:
- Your TDSR is 50% because adding these three instalments gets you to $3,000 – half of what you’re earning each month.
- Your MSR is 16.67% because that’s the result of dividing $1,000 by $6,000.
Although your monthly income is reflected in the MSR & TDSR numbers, that’s not the whole story. Some banks in Singapore may not approve a home loan at all if you’re earning too little from their perspective. Also, smaller incomes may lead to higher interest rates or shorter tenures.
Your Credit Score
Banks in Singapore value credit ratings very much because these numbers reflect the chance of customers defaulting on their loans. Banks also want to minimise their risks as much as possible. Thus, people with better credit scores get better deals.
Here’s the good news:
That’s not always the case with licensed moneylenders in Singapore. Agencies with a lot of experience in the market, like Lending Bee, understand that people’s past actions aren’t always the best indicator of their behaviour.
As a result, expert licensed moneylenders like Lending Bee will assess cumulative factors that show if you’ll be a responsible customer.
Purchase Price vs Internal Valuation
That 75% home loan is based on whichever number is lower:
- The purchase price
- The internal valuation
So, if you’re paying $350,000 for your home, but the bank only values it at $300,000 – you’re going to get a $225,000 loan. That means you’ll need to fork out the difference in cash from your pocket.
Pro tip: Before officially applying for a home loan, ask the bank for an indicative valuation. Also, ask them for an in-principal approval to ensure they won’t reject your submission.
2. Home Loan Tenure
Your home loan tenure is another essential factor because it defines the period during which you’ll have an unpaid loan. Home loans are usually 10 to 35 years in Singapore, and they have unique sets of pros & cons.
|Shorter||· You’re debt-free faster.|
· You pay less interest overall.
· You can qualify regardless of your age*.
|· You have larger instalments.|
|Longer||· You have smaller instalments.||· You pay more in total interest.|
· It takes longer to clear your home loan.
· You may not qualify, depending on your age.
* Age is an essential factor for some banks in Singapore. Many financing institutions will select a tenure that finishes when you reach 65 years old. Thus, your home loan tenure may only be ten years if you’re currently 55.
As a result, most young people opt for longer home loans while older people choose shorter terms.
3. Fixed vs Floating Rate
Fixed rates don’t change during your home loan’s tenure or a preset period. This predictability translates into financial security because you know precisely how much you’re expected to fork out every month for your loan instalment.
Here’s what that means:
Even if interest rates rise in Singapore, your home loan won’t be affected. Besides, those rates are relatively low in our country, even if we observed some ascending trends in 2019.
But there’s a problem:
You’ll reimburse more interest if you choose a house loan with fixed rates, especially if you foresee a rate decrease. In this case, your first rates will be lower, and so will your subsequent monthly instalments.
That leads us to the next point: How are these rates defined?
Two significant benchmark rates influence these floating rates:
- Singapore Interbank Offered Rate (SIBOR), which is currently the number one standard
- Swap Offer Rate (SOR)
Also, variable rates depend on:
- US interest rates
- Our banking system’s liquidity
Pro tip: The current SIBOR for one month is around 1.88%, but that rate was twice as high ten years ago. So, if you want to go for variable rates, use an up to 4% buffer when you assess your budget. That’s to make sure you can still afford that home loan in case of an unpredicted spike in interest rates.
4. Home Loan Promotions and Other Goodies
The extra features to consider before taking a home loan are:
- Interest offset features. If you already have savings at the bank that grants you your home loan, you can use that money to offset the loan. As a result, you’ll only have to reimburse interest for the difference. This option fits people with significant liquidity they don’t want to tie up in other ventures.
- Interest-only packages. This alternative is excellent if you have a smaller budget now, but expect to see your earnings rising considerably. Therefore, interest-only packages allow you to pay only the interest during a specific period before the instalments will include payments towards the principal amount.
- Additional discounts. If you have a long relationship with a specific bank or licensed moneylender, they can offer extra discounts that aren’t officially included in their advertised packages.
5. Home Loan Subsidies
Make sure your home loan comes with practical subsidies, such as:
- Legal fees
- Valuation charges
- Fire insurance
Thus, when comparing different alternatives, analyse those subsidy sums through the lens of your needs. For example, legal fees are capped at $2,500 in Singapore, but the property you want to purchase might require you to fork out higher legal fees. In this case, consider a home loan with higher legal fee subsidies.
6. Home Loan Lock-in Period
This lock-in period depends on two factors:
- When you expect to sell the home, you’re currently buying
- The interest rates
Thus, if you want to share that property quickly after buying it, you’ll want a shorter lock-in period. However, that means you’ll have to pay higher interest rates and a 0.75-1.5% penalty if you reimburse your entire loan before that lock-in period expires.
That brings us to the next point:
7. Early Repayment Penalty
If you repay your loan before the deadline, the bank will impose an early penalty fee. The logic of that extra money is this: you’re paying more interest to the bank during a longer term. So, when you’re blindsiding the bank by cutting your contract short, they impose that penalty to cut down their losses.
However, the bank may not charge that fee if you’re selling your home to someone else.
Pro tip: Discuss cancellation fees thoroughly with your bank or licensed moneylender before committing to a contract.
Factors that Influence Your Home Loan Conclusion
Choosing the right home loan is essential because you’re stuck with it for at least ten to 35 years. So, compare different credit providers carefully, always using your needs as the main criterion. Even if some banks have glamorous offers that steal your eyes, stop to think if those offers benefit you personally.
For instance, Lending Bee offers some of the highest principal amounts in Singapore, but our interest rates are also low – around 1% for secured loans such as home loans. Besides, our team of expert officers will customise your home loan according to your financial situation and plans. For example, we can help you with the advance payment even if you get your home loan from another institution.
As a result, Lending Bee is a trustworthy partner you need during a long-term home loan.
Get in touch here.