Many factors determine whether you rent or buy a home, including affordability, eligibility, future plans, and level of commitment.
Most people will finance a house with a loan. It is crucial to evaluate how much you could comfortably afford to spend every month on a mortgage payment.
The type of home you’ll be able to afford will vary depending on your income, expenditures/liabilities, cash savings, investments, CPF Ordinary Account savings, sales proceeds from your current home (if any), and your creditworthiness.
How Will You Finance a Home?
This is the starting point when purchasing any property. Will you need a loan to finance a home, or can you afford to pay in cash? Most people will need a loan. It is crucial to evaluate how much you could comfortably afford to spend every month on a mortgage payment.
Maximum loan periods are capped at 25 years for an HDB flat using an HDB loan, 30 years for an HDB flat using a bank loan, and 35 years for a private property using a bank loan.
Remember: Property is a long-term commitment!
Tip ⭐️
For the same amount of money borrowed, a longer loan tenure means your monthly payment is lower, but your overall interest paid is MUCH larger!
The type of home you’ll be able to afford will vary depending on your income, expenditures/liabilities, cash savings, investments, CPF Ordinary Account savings, sales proceeds from your current home (if any), and your creditworthiness. We do not recommend taking out new credit lines, such as a credit card, shortly before you plan on purchasing property, as this will likely have an impact on your credit score.
You can borrow money from the Housing Development Board or a private financial institution (bank) to buy your property.
Your property is used as collateral for the loan you take out
The size of your loan is based on eligibility
Your loan is disbursed after the down payment is paid
You will be charged interest from the opening disbursement
For more information about housing loans, click here.
Eligibility for Home Loans
If eligible, HDB flats can be purchased with a loan from the HDB. You can borrow up to 85% of the property’s purchase or valuation price, whichever is lower. Any loan from a financial institution must be from one regulated by the Monetary Authority of Singapore. You cannot refinance any loan from a financial institution with an HDB housing loan later on.
The lender will assess how much you can borrow using the following methods:
1. Mortgage Servicing Ratio (MSR)
States the amount of your gross monthly income towards your mortgage repayment
MSR = Monthly mortgage repayment/Gross monthly income
Monthly instalments of both HDB and bank loans must not exceed 30% of gross monthly income
2. Total Debt Servicing Ratio (TDSR)
States the amount of your gross monthly income used for monthly debt repayments.
TDSR = Total monthly debt repayments/Gross monthly income
Non-applicable for HDB loans, but for bank loans, your total monthly debt repayments must not surpass the TDSR threshold of 60%
3. Loan-To-Value Limits
This determines the maximum amount you can borrow for a housing loan.
LTV = loan amount/property value
The lender will grant a loan after consideration of existing loans and credit facilities, your MSR, tenure of the loan, and any other rebates or other discounts granted
LTV limit for an HDB loan is 90%, compared to 75% for a bank loan
Interest Rate on HDB/Bank Loans
If you take out a loan from the HDB, the interest rate is fixed at 0.1% over the CPF Ordinary Account (OA) interest rate. The CPF OA interest rate is amended in accordance with the amendment of CPF interest rates. As of September 2023, the CPF OA interest rate is 2.5% (the legislated minimum rate.)
Suppose you take out a loan from a private financial institution. In that case, you have two types of home loans available:
Fixed-Rate Home Loan
Unchanged rate throughout the lock-in period (1-5 years on average)
Does not change even when market rates change
Interest becomes variable following a fixed-rate period, pegged to a board rate, meaning that unlike in some other countries, these loans are not actually at a fixed rate for the life of the whole mortgage
At the time of writing in September 2023, rates are around 3.9% PA throughout the lock-in period
Suitable for those with low-risk appetites
Floating/Variable Rate Home Loan
The interest rate varies and is often fixed to a reference rate such as the Singapore Interbank Offer Rate (SIBOR), Board Rate, Fixed Deposit Home Rate (FHR).
More volatile than a fixed rate home loan
Reference rate can change at any time and is influenced by market conditions
Can lead to significant savings if interest rates take a nosedive, but of course, work the other way if rates shoot up
You can switch an HDB loan to a bank loan, but you can’t switch a bank loan to an HDB loan.
What Happens if I Pay the Loan Back Early?
Though this may seem a good idea, you could be penalised! If you’ve taken out a bank loan, you may incur fees for early repayment, so read the small print carefully, or talk to an experienced professional, such as a mortgage broker. Fortunately, HDB loans have no such penalty.
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