One of the best and fulfilling achievements is purchasing your first home for your family.
But once you start shopping around for your dream home, you’ll realise Singapore’s property market is not the friendliest.
If you have not saved enough or are a first-time home buyer, you’ll need to secure a home loan in Singapore.
This is a crucial step where you must plan and calculate your finances before starting your home loan application process.
Most homeowners are more concerned with the question “how much can I borrow for home loan?” instead of first considering “how much loan can I afford?”
Yet the latter should actually be your first consideration.
You’ll understand this when you calculate the estimated loan interest you’ll have to part with over the term of the loan. It’s a huge figure.
However, you can use a mortgage calculator in Singapore to get a solid estimate of the loan amount you can afford to borrow.
How Loan Amount And Tenure Are Determined
Purchasing your dream home can be a costly affair that can discourage many first-time homebuyers.
Fortunately, home loans in Singapore provide borrowers with sufficient funds and the benefit of low interest rates – if you know where to look.
Lenders will consider several factors before determining your loan amount. Just like other loan types, home loan lenders in Singapore will evaluate the following details:
- Credit score
- Current income
- Repayment history
- Equated monthly installment
- Employment history
Lenders are always looking to offer low-risk loans, which is why they consider the above.
When it comes to home loans, lenders will also consider the following:
Debt-To-Income Ratio (DTI)
Lenders use the DTI to determine you have sufficient income to cover both your new mortgage payment and other existing monthly debts such as a student loan, auto loan, and credit card repayments.
The DTI ratio is calculated by dividing your entire total monthly debt load by your monthly gross income. The debt-to-income ratio determines the maximum monthly mortgage payment you make.
Your credit score is one of the most important factors when securing a mortgage loan.
It is based on your overall debt level, payment history, application for new credit, and types of credit.
If lenders see that your credit score is poor, they might be cautious of approving you for a loan.
You might still be able to get a loan even with a low credit score, but you are likely to pay a higher mortgage rate, which translates to a higher mortgage payment.
Therefore, before applying for a home loan, check your credit report to see where you stand, and understand the requirements you need to meet with the lenders.
With the exception of some special loan programmes for first-time buyers, purchasing a home requires some downpayment.
You will need to set aside at least 20% of the property price.
The home loan tenure refers to the period a borrower can take to repay the loan amount and the interest.
So what is the ideal tenure for a home loan?
Typically, the minimum tenure is two years and can go up to 30 years, depending on the lender. When deciding on the tenure, you need to consider your financial priorities.
If looking to save on interest, you can select a short tenure, which comes with high monthly installments.
But if you are looking for a comfortable and hassle-free repayment experience, a longer tenure is your ideal option.
You will pay less every month, but attract a higher interest in the long run.
The factors to keep in mind before choosing your home tenure include your:
- Remaining earning years
- Monthly budget
- Purpose for purchase
- Type of home loan
- Home loan interest rate
How Much Can You Borrow?
In Singapore, if you take out a bank loan, you’ll get 75% of the home’s price as the maximum amount you can borrow.
With a HDB loan, you can cover up to 85% of the home’s price.
Bank loans will allow you to buy private properties, not only a HDB flat.
Normally, banks use floating interest rates for their mortgage loans, hence the total charged interest rate is lower.
In addition, property holders will be debt-free faster. A HDB loan is ideal if you don’t have enough cash to cover the entire downpayment using your CPF funds.
A HDB resale loan equates to around 85% of the purchase price.
To calculate how much you can borrow, use a mortgage calculator, which factors in typical mortgage payment elements such as interest and principal.
The calculator can also factor in insurance and taxes to help you estimate your monthly payment.
So to use a housing loan calculator in Singapore, include your annual income, expected loan term, and rate of interest, as well as your monthly debt payments and other home-related expenditures.
It will give you results that include:
- The maximum loan amount you might qualify for
- An estimate of the maximum mortgage amount
- How much monthly payment might be for the amount
What Is The LTV Ratio?
The loan-to-value (LTV) ratio is a term that refers to the ratio of a loan to the value of the property bought.
The LTV is a common phrase in real estate transactions.
In other words, the LTV ratio is the amount you can borrow to finance a home.
For instance, an LTV ratio of 80% means you can borrow up to 80% of the home value or price. If the property is priced higher than its actual value, this difference is known as Cash Over Value (COV) in Singapore.
Usually, the maximum LTV for HDB concessionary loans is 85%, with the remaining 15% to be paid via cash, your CPF Ordinary Account (OA), or both.
If you’re wondering “How much loan can I get from bank?” here’s the answer.
For banks, the maximum LTV is 75%, with the remaining 20% paid via your CPF OA, or cash.
However, an absolute minimum of 5% has to be paid in cash.
The maximum housing loan in Singapore goes for a period of up to 30 years for a HDB flat and 35 years for private property.
Note that LTV ratios do not differ due to the property type you’re buying, but the lender that you’re borrowing from.
This means that if you buy a HDB flat, but you’re planning to finance it with a bank loan, then the applicable LTV would be 75%, with a minimum 5% paid with cash, and the remaining 20% paid with CPF OA, or cash.
How Does LTV Ratio Work?
The LTV ratio of a home is given by the mortgage amount divided by the appraised property value, and is expressed as a percentage.
It can be used when refinancing an existing mortgage into a new loan, buying a home, or borrowing against accrued equity within a property.
Lenders assess the LTV to identify the level of risk exposure they’re taking when granting a home loan.
When you request a loan for an amount near or at the appraised value, the lender may see that there is a higher chance of the loan going into default. This is because there is little equity built up within the home.
Therefore, in case of a foreclosure, the lender may find it challenging to sell the property for enough to make a profit and cover the remaining mortgage balance.
Besides, most lenders prefer LTV ratios to be below or at 80%, which will attract the lowest possible interest rates.
A higher LTV ratio attracts a higher interest rate on the loans. As the LTV ratio increases, so does the rate of interest and the level of risk to the lender.
If your LTV ratio is higher than 80%, you may be required to buy private mortgage insurance (PMI).
This can add around 0.5% to 1% to the total loan amount yearly. The PMI ratio decreases as you repay the loan and as the home’s value increases with time. This is the same for a bank loan for condos in Singapore.
Most lenders require an 80% LTV ratio for borrowers to avert the extra PMI cost.
Exceptions are often made if you have a high income, large investment portfolio, or a lower debt. For a successful home loan application, a good LTV Singapore ratio should be below 80%. Anything above this is deemed to be a high LTV, which will attract a higher borrowing cost, require PMI, or result in loan rejection.
Factors That Lower The LTV Ratio
A lower LTV ratio means you are eligible for a smaller loan from the bank. Below are several factors that could result in a lower LTV ratio:
Homes with less than 35 years left on their lease may not qualify for a bank loan – unless you’ve made a private deal with the seller.
The LTV of properties with 36 to 40 years left on their leases is normally capped at 60%.
State And Location Of The Property
Property located in highly sought after areas have a higher resale value. Those located in seedy locations are likely to have a lower resale price. The condition of the property is also a consideration.
Your Loan Tenure And Age
Your age and loan tenure also affects the amount of the bank loan you can get.
The LTV for private homes is limited to 55% if the duration of the loan is 30 years or more. The HDB loan maximum loan tenure is 25 years while bank loans have a maximum tenure of 30 years.
Your Credit Score
A bad credit score can lower the LTV. To avoid this, maintain a good credit score by keeping your credit card balances low and keeping up with your monthly loan repayments.
How To Get A HDB Loan
If you’re looking to purchase or take over ownership of a flat, you can apply for a housing loan from HDB or from other selective financial institutions.
Make sure you understand the crucial terms and conditions for the different loans before signing on the dotted line. Here are the criteria for a HDB loan:
- At least one of the buyers must be a Singapore citizen
- You have not taken two or more housing loans from HDB before
- You have taken one housing loan from HDB
- Seniors above 55 years old must not have applied for a short-lease two-room community care apartment or flexi flat
- Singles who are at least 35 years old must buy either a two-room flexi flat on a 99-year lease from HDB in non-mature estates or a five-room (or smaller) resale flat.
- The monthly household income ceiling should be $14,000 for families, $21,000 for extended families, and $7,000 for singles
- The remaining lease of the flat should cover the youngest buyer to the age of 95.
If it is the first time you are buying a home, don’t worry.
Whether you’re looking to buy a new home or move to another one, U Credit has you covered.
With vast experience in the Singapore mortgage sector, we’re committed to providing the best loan terms depending on your needs and without tons of paperwork and lengthy processes.