What You Should Know About Housing Loans – The Basics
What to bear in mind:
- Consider whether you can afford to service the monthly repayment instalments.1 You can approach a bank for an Approval-In-Principle (AIP) as it is advisable to know the potential loan amount before committing to a property purchase. Take note that an AIP is not binding; the actual loan amount approved may differ from AIP after the bank processes the application
- Assess if you are able to meet the prevailing Total Debt Servicing Ratio (TDSR) threshold before committing to any property purchase.
- Check if you can meet the prevailing Mortgage Servicing Ratio (MSR) limit before committing to a purchase of an executive condominium directly from a property developer or any HDB flat.
- Allow for contingencies including interest rate increases over the term of the housing loan
- Find out your CPF Withdrawal Limit if your CPF savings are used in the purchase
- The bank charges overdue interest if monthly repayment instalments are late
- If you fail to pay your instalments, the bank can recall the housing loan and repossess your property for sale
The bank may make you a bankrupt if the sales proceeds from your property are less than the outstanding housing loan and interest payable, and you are unable to repay the shortfall
- The duration of the housing loan is known as the loan tenure or repayment period
- In the case of joint borrowers, banks will compute the income-weighted average age of all borrowers to determine the loan tenure
The two broad categories are:
- Fixed rate loans
- Variable rate loans
What's the Difference
Fixed Rate Loans
Fixed Rate Loans
Interest rate is fixed and cannot be changed in the first few years. This means the monthly repayment instalments are fixed for this period (assuming no further loan disbursements or prepayments during the period and no change in the loan tenure). The fixed-rate period will be set out in your Residential Property Loan Fact Sheet and your housing loan agreement.
This is a good option if interest rates are low when you take up a housing loan or if you want to budget with certainty over the initial few years of your housing loan as the fixed interest rate will not change, even if prevailing interest rates rise or fall.
After the fixed-rate period, the interest rate becomes variable. The housing loan then works like a variable rate loan.
Variable Rate Loans
Variable Rate Loans
Interest rate is not fixed but can be varied by the bank at any time. This variable rate is benchmarked against a reference rate that is pegged to publicly available market indicators (e.g. Singapore Interbank Offered Rate (SIBOR), Singapore Swap Offer Rate (SOR)) or determined by the bank (e.g. internal board rate).
If the reference rate goes up, so will your housing loan interest rate and monthly repayment instalment. If the reference rate goes down, your housing loan interest rate and monthly repayment instalment should also vary accordingly, subject to the terms and conditions in the housing loan agreement.
Generally, for reference rates that are pegged to publicly available market indicators or that are determined by a bank.
a. Changes to Interest Rates
Banks must inform you in advance (usually 30 days) before they change the interest rate on your housing loan.
b. Changes to Loan Terms and Conditions
Banks must inform you in advance (usually 30 days) before they change or vary the terms and conditions of your housing loan agreement.
You will also need to notify the bank and obtain its consent when you seek to vary the housing loan agreement, such as by repaying or re-financing your loan.
Ask the bank what notification is required for any change initiated by you.
Shop Around to Find the Most Appropriate Package
- Compare alternatives and find the package that best fits your financial circumstances
- Do not be enticed into deciding based on advertisements, headline rates or gifts
- Compare features such as:
- – interest rates
- – lock-in period and fees, in particular penalty fees for early prepayment
- – cancellation fees
- – requirement for Mortgagee Interest Policy
- – bank subsidies for fees for valuation, legal and conveyancing services and fire insurance. Note that you must declare all discounts, rebates or other benefits that you receive from the seller or any other party that have the effect of reducing the purchase price of a property such as furniture vouchers and the payment of stamp duties by the vendor on your behalf
- If you are considering re-financing, check the prevailing interest rates offered by other banks after the lock-in period and compare it with the rate you are currently paying; do also consider the costs associated with re-financing such as legal fees
- When browsing on the Internet for housing loans, note that some of the information may not be the most recent. Always talk to your bank and ask for the latest product information