When buying a property, choosing an affordable and suitable mortgage is a crucial part of the process. After all, your choice would impact up to 30 years of your life, and if not managed properly, could turn into a financial burden. Yet, its importance is overshadowed by the many legal procedures to keep up with as well as the more entertaining aspect of the process — hunting for the perfect property.
The Down Payment
The down payment required for the property is a key consideration for most buyers. Banks have a multitude of considerations before offering mortgages, which may be different among individuals.
If they are offering lower loans, you will have to pay more using either housing grants, cash, or CPF. For young couples, this might be a daunting amount to fork out. Hence, the loan amount is crucial in the choice of determining which loan to get.
The Loan-To-Value Ratio (LTV)
Private banks generally offer a lower LTV compared to HDB housing loans. If you will be 65 years old or younger at the end of your mortgage tenure, most of them are willing to loan you up to 75% of your Valuation Limit (VL), which refers to the lower property price or value at the time of purchase. Meaning, you would need to pay for the remaining 25% of your VL.
Meanwhile, HDB loan offers a higher LTV of 85%, amounting to a 15% down payment that could be financed using CPF, cash, or housing grants.
Mortgage Servicing Ratio (MSR) & Total Debt Servicing Ratio (TSDR)
In addition to the LTV, banks also consider your financial health using Mortgage Servicing Ratio (MSR) for HDB flats, and Total Debt Servicing Ratio (TSDR) for private properties.
Your potential mortgage liability must be < 30% of your income and all your monthly instalments must be < 55% for HDB Loan. If you are borrowing for Condo & Landed, all your monthly instalments must be < 55%.
Do consider financing your initial payment using your CPF or using housing grants before you balk at the total sum of the down payment!
Grants
Are you a Singaporean looking to buy a resale HDB flat with your spouse, and do not own any property? You may be eligible for HDB Grants! CPF also offers housing grants of up to $80,000 for first-time applicants for new HDB flats.
CPF
You can use your CPF Ordinary Account to finance your monthly mortgages and pay part of your down payment after you have paid the minimum cash down payment of the Valuation Limit (VL), and Cash Over Valuation (COV), if any.
CPF can be used to pay off your mortgage up to a maximum of 120% of the VL. However, using CPF to finance your home loan also means that you would have to repay CPF the drawn amount and accrued interest at 2.5% upon the sale of your HDB flat. If your monthly contributions to your CPF Ordinary Account can cover it and any other commitments, you may want to use this to pay for your property. After all, your account is created for this very purpose!
Hence, before considering the interest rates, you must ask yourself – do I have the money for the down payment if I take up this loan?
Cash Requirements
Even if CPF and housing grants could theoretically cover the initial payment, you may still need to pay part of the down payment if there is a difference between the property value and property price.
Cash Over Valuation (COV) is the difference between the valuation price and transacted price of the property — this must be paid in cash.
Example:
Purchase price = $400,000
Valuation = $350,000
Cash over Valuation (COV) = $400,000 - $350,000: $50,000 (to be paid in cash)
Loan Tenure
When comparing loans, another important factor is the loan tenure. Banks are generally willing to offer longer loan tenures to younger borrowers. But if you have a choice, which is better?
Repaying your mortgage loans over a longer period results in lower and more affordable monthly instalments. While this is great for those looking for liquidity, it may not be desirable for those who want to minimise the borrowing cost.
Loan Structure
Loan structures have a big impact on your monthly mortgage payments. Banks usually offer loans with fixed or floating interest rates, which refers to reference rates including Singapore Overnight Rate Average (SORA).
In contrast, the HDB Concessionary Loan offers 2.6% interest rate until further notice. Even though private banks often offer “fixed interest rate” mortgages, these are fixed for a few years before pegging it to SORA, or the bank’s board rate.
While floating interest rates help to combat inflation, volatile rates may result in a significant increase in monthly mortgage instalments which may no longer be affordable.
Moreover, some banks include extra charges on top of interest rates, resulting in the loan being far more expensive than they appeared to be. Before choosing your loan, be aware of any opening or closing costs as well as prepayment costs – which are penalties applied by the bank for those who choose to repay their loans earlier than tenured. Hence, look beyond the interest rates, and make sure to read the fine print!
While it may seem daunting to choose the perfect loan among your myriad of options, the most important consideration should be the affordability of the loan. Having a clear understanding of how much down payment you can afford alongside your preference for loan structures and loan tenures may help you to make a better informed decision!
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