Five Things To Consider When Applying For A Mortgage Loan In Singapore

Singapore has one of the highest home-ownership rates in the world, and although property prices are expensive in the land-scarce nation, the government has done their best to make housing affordable for everyone.

However, due to the high prices, most people have to take up a mortgage loan in order to be able to afford buying property. With how complex mortgage loan jargon can be and so much money on the table, it is important that you know exactly what you are getting into before you jump into financing your first home.

Here are five essential factors you need to think about before signing on the dotted line:

Eligibility

Before a bank decides to approve your home loan, you need to meet certain eligibility requirements, such as age, annual income and credit score. This is the normal procedure as with any type of loan you take up, a background check of your financial situation is required in order to ensure that the chance of the borrower defaulting on the loan is low.

One of the more important hurdles to keep in mind for a home loan in Singapore is the Total Debt Servicing Ratio (TDSR). The TDSR is one of the most significant cooling measures implemented by the government since 2013 as an effort to quell rising property prices. It is meant to prevent borrowers from becoming overleveraged.

To explain the TDSR simply – when you put in an application for a home loan, the bank needs to ensure that your monthly debt obligations compared to your monthly income do not exceed 55 percent. This total debt includes not just your mortgage loan, but also your car loans, study loans and even credit card debts. It is important to be aware of all your debt obligations, or better yet, pay down your existing debt, to give yourself better standing to take on a new mortgage loan.

Related: Home Mortgage Loan Basics: Total Debt Servicing Ratio (TDSR)

Fixed Vs Floating Rate

One of the most important factors when choosing a home loan is the interest rate. It is not just about how low the interest rate is, but also whether it is fixed or floating, and what benchmark rate it is using.

Fixed rate loans mean the interest rates stay the same over a fixed period of time, typically two to three years, while floating rates fluctuate and are usually pegged to a benchmark rate.

Choosing a fixed rate loan lets the borrower better plan his finances because he’ll know the exact amount he will need to pay each month. This is especially crucial for someone who is using the property as an investment and collecting rental income to service his monthly mortgage. The main concern with a fixed rate loan is that you end up paying more should interest rates drop in the coming months. Floating rate loans, on the other hand, may be more favourable in such an environment. However, the trade off is that floating home loans are typically more unpredictable as the interest you pay month to month depends on how the underlying benchmark rate fluctuates.

Ultimately, you choice to go with a fixed or floating home loan is dependent on your risk appetite and how you expect interest rates to trend in the coming years.

Related: Should You Get a Fixed Home Loan or a Floating Home Loan?

Benchmark rates

Home loans here are usually based on a benchmark interest rates. The primary benchmark rate used for home loans in Singapore is the Singapore Overnight Rate Average (SORA).  The SORA is administered by the MAS and is based on the overnight interbank funding market. Previously used benchmark rates like the Singapore Dollar Swap Offer Rate (SOR) or the Singapore Interbank Offered Rate (SIBOR) will be phased out by the end of 2024. The move is towards SORA is because SORA is less volatile and more robust than the previous benchmark rates used. Typically, banks will peg their home loan interest rates to the one-, three- or six month compounded SORA.

Related: Homes Loans: From SIBOR and SOR to SORA – What Homeowners Should Know

Loan Conditions

Other than focusing on interest rates, borrowers need to be aware of the conditions attached to their home loan so that they will not be caught by surprise should they consider the option to refinance later. These conditions can affect the cost of refinancing and can negate the potential cost savings. One of these conditions is the lock-in period tied to your current mortgage loan. If you choose to refinance within the lock-in period, get ready to pay a pre-payment penalty. If you think that the current interest rate environment will change greatly in the next 2 years, it might make more sense to take up a loan without a lock-in period so that you have the flexibility to refinance as soon as you want.

Banks may dangle some lovely carrots in order to entice borrowers – free fire insurance, valuation reports as well as subsidies for legal fees. While all’s good when you take up the loan, most banks have the right to claw-back these ‘goodies’ if you refinance within the lock-in period. Be careful to read through these conditions before you are sure to take up the chosen loan.

Related: The Basics of Refinancing Your Mortgage Loan

Mortgage Insurance

If you are shouldering the bulk of the mortgage debt and have dependents, you should consider taking up a mortgage insurance plan.

Mortgage insurance plans, also known as Mortgage Reducing Term Assurance (MRTA), provides coverage for the outstanding home loan amount in the unfortunate situation where the borrower dies or become total and permanently disabled, making them unable to service the mortgage. This could leave the borrower or their family in the precarious position of potentially loosing their home if they are unable to service the home loan. So to provide a peace of mind, especially if the borrower is shouldering the main loan burden, it could be a smart move to take up a mortgage insurance.

Now that you know more about all the factors that you need to take note off before you take on a mortgage loan, you’re in a better position to make a well-informed decision. If you are still in the process of narrowing down which home loan best suits your needs, read our round up of all the best home loans in Singapore.

Read More:

• Guide to the New Measures to Help First-Timer Families Buy A HDB Flat
• Buying a Resale Flat in Singapore? Here are 6 Things You Need to Check
• What’s the Average Cost of Housing in Singapore?
• How To Be Financially Prepared to Buy An HDB Flat Before You Turn 35
• Choosing Between An HDB Flat And A Condominium – The Deciding Factors

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