A home Loan is probably one of the biggest financial commitments that you would undertake during your lifetime. So, it is always wise to keep yourself prepared and to understand the intricacies involved in going for a home loan. We’ve tried to summarize some of the main points to keep in mind during your home loan shopping purpose:
Learn – Try and get to know as much about home loans and the terms involved. A website like MoneySENSE (moneysense.gov.sg) which is part of a continuing national financial educational program launched by the Monetary Authority of Singapore (MAS) in 2003, is a great place to start out.
Eligible properties – Properties that you can purchase using a home loan include HDB flats (either direct purchase or resale), private properties which are already built and private properties under construction.
Types of home loans – There are two types of home loans (and a wide range of home loan products based on these two types) available:
Fixed-rate home loans – A fixed rate of interest is applied for the first few years (period may vary from bank to bank), thereafter following by a floating rate.
Floating or variable rate home loans – These are usually tied to a reference interest rate (usually SIBOR or Singapore Interbank Offered Rate). Your monthly repayments may vary depending upon movements to the reference rate.
Regulatory changes in relation to home loans – Keep yourself updated with regard to the latest changes in home loan regulations and how they impact your home loan plans. Here, we will look at some of the changes introduced by the MAS which came into effect from the 29th of June 2013:
A Total Debt Servicing Ratio (TDSR) framework was introduced. It is the ratio of your income and liabilities. The MAS has capped TDSR on property loans to 60% to encourage prudent borrowing. Your consolidated debt repayments including your home loan repayment, car loans, renovation loans, study loans, credit card loans and other secured or unsecured loans cannot exceed 60%. And, incomes that include variable components are subject to prescribed haircuts before TDSR is applied.
The maximum Loan to Value (LTV) that can be borrowed is 90%. LTV is a term that describes the housing loan quantum a bank or financial institution will offer as a percentage to the valuation of the property in question.
The MAS has also put in place curbs on the tenor of home loans – 30 years for HDB flats and 35 years for private properties.
Get an Approval in Principle – These are approvals given by the bank that indicate the home loan amount that you are eligible for based on your credit report and affordability. This is merely indicative and is not a binding agreement. You must still submit a home loan application and final approval is subject to property valuation and other checks.
It is advisable to have an AIP in place before you commit to a property. If you do not have an AIP and book a property and are not able to get a loan approved within 14-30 days your booking fee which may amount to thousands of dollars is forfeit.
Refinancing – Refinancing refers to switching your existing home loan to a different financial institution usually to benefit from lower interest rates. But before you refinance check out Notice 632 penalties; these can be levied if you are still in the lock-in or claw-back period. Try and refinance only if you get a rate that is low enough to offset the penalties imposed or sit tight and wait out your lock-in period.
Consult an expert – Going in for a home loan that may stretch up to 35 years means that you should be familiar with all the angles before you make such a huge investment of your time and money. Getting an expert to help you understand the financial ramifications of your goals and planning towards achieving them is highly recommended. Just make sure that the financial adviser you are approaching is a qualified financial adviser under the Financial Advisers Act.