Ravi Chandran
Market analysts predict that bank home loans can reach a high interest rate of 3.5 percent – a hike not seen in decades. But this hike is not likely to dampen the property market or home loan needs.
Mortgage rates have been rising, and Singapore’s largest lender, DBS, has recently removed its five-year fixed rate HDB package. The fixed-rate mortgages from many banks are now higher than the HDB loan rate of 2.6 per cent, which is pegged at 0.1 percentage points above the Central Provident Fund Ordinary Account rate of 2.5 per cent.
The impact of the interest rate hikes will be dependent on the loan quantum and borrowing profile of HDB homeowners. Most flat owners may not be too adversely affected by the rate hikes now, given that safeguards are in place. All borrowers are subjected to the mortgage servicing ratio (MSR) and total debt servicing ratio (TDSR), limiting the amount of money one can borrow based on their income. As the loan quantum for most flats is not large, those who took private loans should still be able to service their mortgages.
First-time buyers who have not taken any loans will likely apply for an HDB loan since the latter’s rates are lower. Further, HDB loan rates are not subjected to fluctuations, thus providing more financial stability for borrowers. Some borrowers may take up an HDB loan first and switch to a bank mortgage should rates drop later. However, they cannot return to the HDB after taking a bank loan.
However, the impact may be more keenly felt when bank home loans interest rates move above 3.5 per cent for mortgages.
When interest rates for home loans are high, borrowers may be reluctant to spend too much on a new flat since buyers are faced with less affordability and lower borrowing power. Housing demand and prices may moderate when more buyers turn cautious in their home purchases.
Market researchers at Orange & Tee pointed out that the demand for public housing is relatively stable because of critical factors like employment rate and income growth remaining stable. Also, the public housing market is usually less susceptible to macroeconomic fluctuations, unlike investment properties.
If you need financing to buy your dream home, you should secure a housing loan from HDB or try for bank home loan from financial institutions regulated by the Monetary Authority of Singapore (MAS) before you commit to the flat purchase.
When applying for an HDB Loan Eligibility (HLE) Letter, HDB conducts loan assessment to determine the loan amount. The HDB encourages aspiring homeowners not to overstretch their finances.
Wonder why some loan applications get rejected? These factors determine your chances of getting the sweetest “Yes!” from the HDB.
4 Main HDB Loan Assessment Considerations
1. Stable Income
This factor is not different from the eligibility assessment of any CPF Housing Grant like the new Enhanced CPF Grant (EHG). The EHG, for example, requires first-time flat applicants to have worked continuously for 12 months prior to the flat application.Plus, applicants should still be working at the time the flat application was submitted.
Having a stable income tells HDB that you can pay for your home loan’s monthly mortgage instalments.
2. Regular Savings
The HDB checks your ability to have cash savings every month to pay any cash portion of the monthly mortgage instalments and safeguards against rainy days.
While it may be tempting to borrow as much as possible if you can afford the monthly instalments, this can be risky. Your CPF Ordinary Account contributions may reduce as you grow older. This means that you may need to use more cash to meet the loan instalments.
Remember to budget for emergencies and future expenses.
3. Age Limit
The maximum loan repayment period is 25 years or up till the home buyers’ age of 65 years old, whichever is shorter.
Which means that if you get an HDB loan at the age of 30, you should fully pay your loan on your 55th birthday (based on 25 years).
But if you are 45 years old at the time of loan approval, you should fully pay your loan at 65 years old (after 20 years).
4. Good Credit Standing
A credit standing or score is a number used by lenders as an indicator of how likely an individual is to repay his debts and the probability of going into default. It is an independent assessment of the individual’s risk as a credit applicant.
Credit Bureau (Singapore) Pte Ltd (CBS) is Singapore’s most comprehensive consumer credit bureau that has full-industry uploads from all retail banks and major financial institutions. CBS aggregates credit-related information amongst participating members and presents a more complete risk profile of a customer to credit providers. This helps credit providers to determine the likelihood of the customer repaying, thus enhancing their risk assessment capabilities.
In short, you need to spend within your means to have a good credit rating for HDB to approve your loan.
Once you get the HDB’s home loan approval, should there be changes in your financial position, HDB may review their loan offer.
If a HDB flat is your first home purchase, you are able to decide between taking a loan with HDB or with the bank; the difference is the Loan to Value limit, whereby you only need to pay 10% of the down-payment if you take a loan with the former, as compared to 25% if you take a bank loan.
There are many types of grants which you may be eligible for when applying for a HDB. By default, those who have been cleared for a HDB flat will qualify for the CPF housing grants. Thereafter, based on your circumstances, you may or may not receive other types on grants. It is important to do your research first in order to fully maximise the number of grants you can receive.
Whilst there are other types of housing in Singapore that are private, majority of the millennials will turn to public housing as a first step into the housing industry as it is much more affordable, and loans – whether it be HDB loan or bank home loans – will be easier to repay as compared to private housing.
Unlike all other loans, housing loans probably take up the bulk of your debt, hence it is highly advised to do extensive research and find out what grants you are eligible for before making that first home purchase.
First time homebuyers should be aware that the buying process is lengthy one involving several parties.
Different properties have different timelines between when you decide on a house to when you complete the purchase. For example, if it is a property under construction, you will be looking at a progressive payment program. Completed properties typically take 12 weeks before the house is yours, from the point you exercise the purchase agreement.
This type of timeline typically requires the buyer to give 1 per cent option amount in cash on day 1. The buyer then has until day 14 to pay the remaining 4 per cent in cash – this will launch the completion period spanning 10 to 12 weeks. Within two weeks of day 14, buyers will need to pay stamp duties. Finally, two weeks before completion, the buyer would need to make payment for the balance 15 per cent from savings in their Central Provident Fund or cash downpayment.
Besides deciding if they want a HDB loan or bank home loans, it is important for home buyers to set a realistic timeline, be aware of payment milestones and ensure they have enough at each due date to make payment, to avoid unnecessary delays or disappointment.
Lastly, first time homebuyers should allocate enough time (minimum 30 minutes) to thoroughly inspect the house and avoid glossing over the inspection process. When the house is carefully and properly inspected, home buyers can potentially save money in the long run since they are better appraised of what they are committing to.
Home buyers should inspect each room and space within the home and keep an eye out for spaces that could be unsafe or harbour costly pest infestations. Buyers should further check if the house gets adequate sunlight and determine whether the home gets too hot during the day – this might possibly cause higher electricity bills required to cool the home.
In addition to this, it will be sensible to explore the neighbourhood surrounding the home to discover what amenities are available in the community, and whether the location is accessible and suits you and your family.
Follow these tips and prepare to buy a new home properly to make the home-buying process a smooth sailing one. And if you need help to decide if you should take a HDB loan or bank home loans, talk to experts who will be able to give you the best advise.
