So, you have decided that you are ready to embark on your property ownership journey, and want to start looking for your dream home. Before starting your search for the right property, it is important to take several preliminary steps before you make the purchase – one of them being securing a home loan that will help you narrow down your options on the property search.
With a variety of loans to choose from, each with its own terms, interest rates, tenures and implications, it is crucial for you to make informed decisions that align with your financial goals and long-term investments.
In this article, we are exploring the different property financing options available for homebuyers in Singapore, providing insights into what each option is and what it entails. By having a clear understanding of your finances, the different options you have available to you, and the features of each of these loans, you can confidently select a financing option that best suits your needs and preferences.
Understanding Your Financials
Before looking into the different financing options available to buyers, it is vital to assess your personal finance first. This includes gaining a thorough understanding of your budget, your future financial and investment goals, and your credit score. By doing so, you will have a clear picture of the funds you can afford for your property purchase, and ensure you have an informed and strategic approach to securing the financing for your purchase.
Assessing Your Budget
Assessing your budget is the first step to seeing where you are financially as you can keep clear records of all your monthly and yearly earnings and expenses. These include your income, bonuses, additional income sources, utilities, groceries, transport, and any existing debt payments. This will allow you to determine the amount you can realistically allocate each month toward a mortgage payment.
How Do Credit Scores Influence Loans
Credit scores are an important factor to consider when looking for home loan options as they have a significant influence on the loan approval process, your interest rates and the amount of money you can get approved for. Having a higher credit score can lead to finding better loan terms overall.
The Credit Bureau of Singapore (CBS) provides credit reports and scores based on individuals’ credit histories. These scores range from 1,000 to 2,000, with higher scores indicating better creditworthiness.
Types of Property Financing Options
There are several property financing options available in Singapore, and each of these caters to the various needs of buyers. Moreover, each financing option has its own features, advantages and drawbacks. Let’s go over some of the most common property financing options available in Singapore.
Bank Loans Vs. HDB Loans
When buying a Housing and Development Board (HDB) unit, buyers can also choose between getting a bank loan or getting an HDB loan. Both of these financing options serve different needs.
Bank loans are offered by financial institutions in Singapore, and are flexible loan types that are used for various properties – including private residential and investment properties. HDB loans, on the other hand, are specifically designed for purchasing HDB units. Buyers who want to take an HDB loan must meet an eligibility criteria that includes being a Singapore citizen, meet income ceiling requirements depending on the unit type, and fulfil residency requirements.
For a better understanding of bank loan vs HDB loan, check out our previous comparison article here.
Key Loan Features
Each of the financing options we have listed have different terms and conditions, different interest rates, tenures and repayment options.
Loan Amount
Depending on the type of loan you take, buyers can finance anywhere from 75% to 80% of a property’s purchase price or market value, whichever is lower.
For HDB loans, the maximum Loan-to-Value (LTV) ratio is 80% of the property’s value or selling price, whichever is lower. Buyers can cover the remaining 20% of the down payment using a mix of cash and funds from their CPF Ordinary Account (OA) savings. For bank loans on residential properties, the maximum Loan-to-Value (LTV) ratio is 75%. This means the remaining 25% must be paid using a combination of cash and CPF OA funds, with a minimum of 5% cash.
Interest Rates
Interest rates vary between HDB loans and bank loans. Moreover, buyers can choose between a fixed or a floating interest rate. We previously made an article on the different types of interest rates available for buyers trying to secure a home loan.
Interest rates for bank loans are variable as they depend on banks and market conditions. Interest rates for HDB loans are currently set at 2.6 % per annum.
Loan Tenures
Loan tenures for residential properties range from 15 to 30 years. Having a longer loan tenure results in smaller monthly mortgage payments, but can increase the total interest paid over the life of the loan. Moreover, many loans may allow for partial or full repayment without any penalties, offering flexibility to borrowers who may experience changes in their financial situation over the duration of the loan tenure. However, this is a factor that will vary depending on your terms and conditions of a loan.
HDB loans have a maximum tenure of 25 years, and the LTVs for these loans are reduced to 55% if the tenure exceeds 25 years. Bank loans for HDB flats have a 30-year maximum loan tenure. Additionally, bank loans for private properties have a maximum tenure of 35 years.
Repayment Options
The most common repayment option for home loans in Singapore is monthly instalments. This is a payment method where borrowers pay a fixed amount every month that includes both the principal amount and interest. This gives homeowners a way to gradually reduce their loan over time with a predictable cash flow they can keep in their records for budgeting purposes.
Other options include making interest-only payments for a specific period of time, typically the first few years, and then doing monthly payments of the principal and interest. This option allows buyers to improve their cash flow by paying a smaller amount at the start, especially if their property is still under construction, and work their way up later on.
Making the Final Decision
Choosing the right loan is a pivotal stage in the process of financing your property purchase. There are some key things to consider after you have evaluated your finances and explored the various loan options available in Singapore.
Seeking Professional Advice
Consulting a mortgage broker or financial advisor throughout the process of securing your home loan can help you gain valuable insights catered specifically to your circumstances. Moreover, working with these professionals can help you better grasp the nuances within the property market, especially with different loans, identifying the best options available and the step-by-step of the home buying process.
Mistakes to Avoid
It is also good to be mindful of common mistakes to avoid throughout your loan selection process. Let’s go over a few of them.
Ignoring the Fine Print: A common mistake many can make is ignoring the minute details of the type of loan they select. It is essential to ensure you have carefully read the terms and conditions of each loan and received feedback from a qualified professional before making any decisions and signing agreements to avoid surprises later down the line. This also leads us to the next mistake that is commonly made, which is overlooking certain expenses.
Overlooking Hidden Expenses: As the process of receiving a loan involves several steps, documents, meetings and decisions, it can be easy to overlook smaller costs and fees that may not be immediately apparent. These include costs such as processing fees, insurance costs, and valuation fees.
Rushing Your Decision: Another common mistake you should avoid when looking for loan options for your property is making rushed decisions. Making any quick decisions without thorough consideration and research may lead to regret, especially for a long-term investment like a home loan. Take your time to compare all of the options in front of you and seek advice before making your choice.
Closing Thoughts
Ultimately, selecting the right home loan is a key stage in kickstarting your homeownership journey in Singapore. By first understanding your current financial situation, clarifying your long-term investment goals, and exploring the financing options available to you, you can make informed decisions when securing a home loan.
Taking the time to research, compare, and consult professionals to find the right loan can put you on the path towards financial stability and growth alongside property ownership on your journey.
Get In Touch With Us
Are you currently seeking financing options to secure your dream home? We have a team of experienced consultants who are more than happy to assist you every step of the way and answer any questions you may have on your property journey. Feel free to reach out to us here, we look forward to working with you.
