Basics of Home Financing in Singapore

For most of us, buying a home is likely to be the single largest purchase we will ever make in our lives, so it pays to be aware of the best way to approach it.

One recommendation is to follow the A-B-C-D process which would ensure that you do not overcommit yourself.

A – Affordability.

Ask yourself these questions: Are you financially ready to own a home? How much can you afford each month to pay for housing loan obligations after accounting for living expenses?

As a guideline:

   - You should have initial capital of at least 30% of the property's asking price, to cover the down payment, transaction costs, stamp duty, legal fees, and other miscellaneous expenses;

   - Ideally, your monthly mortgage payment should not exceed 30% of your household gross monthly salary;

   - The purchase price of your property should not exceed 5 times your annual household income. This will help you to spend within your means and prevent your property purchase from becoming a strain on your finances.

These are some of the upfront costs you have to take into account:

The option-to-purchase (OTP) fee

An OTP agreement is a legal contract signed between a buyer and a seller of a residential property and basically gives the buyer the exclusive rights to purchase a property from the seller during the option period.

After you and the seller have agreed on the terms and purchase price of the property, the seller will grant you the OTP agreement. To ‘reserve’ the property from the seller, you’ll need to first pay a small booking deposit, which is known as the Option Fee.

For private property, this is usually 1% of the price of the property and the option period typically is for 14 days (although this can be extended). If you, the buyer, decide not to exercise the option, then the fee will be forfeited.

For new HDB flats, the option fee ranges from S$500 for a 2-room flat to S$2,000 for 4-room and larger flats. For resale HDB flats, the option fee is not more than S$1,000.

Downpayment

Once the option has been exercised, the buyer has to pay the downpayment, which can be in cash or using CPF savings from only the Ordinary Account.

The amount payable depends on the value and type of property, whether you have an existing housing loan and the tenure of the new loan (capped at 25 years for HDB flats and 30 years for private properties), and the loan-to-value (LTV) limit (loan ceiling) of the property.

If you are going to take a HDB loan for a BTO or a resale HDB flat, the downpayment would be 15% of the purchase price which can be fully paid with CPF. For bank loans, the downpayment can be up to 25% of which at least 5% has to be in cash.

Buyer's stamp duty (BSD)

The amount of BSD you have to pay depends on whichever is the higher of the following, for example:

Purchase price of the property (as stated in the signed sale and purchase agreement); or the market value of the property (based on the property’s valuation reports).

Even if you manage to negotiate a condo unit valued at S$2 million down to S$1.8 million, your BSD rate will still be calculated based on the original S$2 million, since it’s the higher of the two amounts.

The amount payable is the sum of 1% of the first S$180,000, then 2% of the next S$180,000 and then 3% for the next S$640,000 and so on. BSD is 6% of the amounts in excess of S$3m.

If you’re buying a second or third home, make sure you familiarise yourself with the Additional Buyer’s Stamp Duty that is payable as the amount is high.

Third party costs

This would include valuation and legal fees as well as agent’s commission (if any).

Also, don’t forget to include home insurance premiums – if you are using CPF to pay for your home loan taken for a HDB flat, then it is compulsory for you to have the Home Protection Scheme, which is a mortgage-reducing insurance that protects members and their families against losing their HDB flat in the event of death, terminal illness or total permanent disability.

B – Budget.

After you have worked out how much you have left after settling your monthly expenses, check how much you can borrow with this amount. You can make use of several calculators from CPF, HDB and MoneySense to do this.

Also find out your eligibility for CPF Housing Grants if you are buying a HDB flat.

When drawing up your housing budget, make sure to include recurring costs such as the monthly mortgage payments, utility bills, property taxes, service and conservancy charges and insurance premiums.

C - Credit.

It would be best to do a bit of home loan shopping before signing on the dotted line. Compare bank loans and their terms with a HDB loan (if buying a HDB flat).

HDB or bank loan?

The choice between a HDB or bank loan can sometimes come down to whether the buyer prefers to have a fixed-rate mortgage loan or one whose interest rate is floating.

HDB loans are pegged at 0.1% above the CPF Ordinary Account interest rate. Given that the latter has been 2.5% for many years now, this means that HDB loan borrowers know that their interest rate is likely to stay at 2.6% for many years, which allows them greater certainty to plan their finances.

Bank loans on the other hand, could be attractive to those who think interest rates are going to come down, to below 2.6%.

Note however, that there are qualifying criteria for HDB loans, such as at least one buyer must be a Singapore citizen, the monthly household income cannot exceed S$14,000 and they buyers must not own or have disposed of private property in the previous 30 months.

Also, loans for HDB flats (whether from HDB or banks) are subject to the 30% Mortgage Servicing Ratio (MSR), which means that monthly repayments cannot exceed 30% of your gross salary.

A bank loan on the other hand, typically has fewer restrictions than an HDB loan – the bank usually does a credit check and if all goes well, the loan is granted.

However, note that banks tend to have lock-in periods for the initial period of the loans, usually not more than 2-3 years, after which the interest rate will be re-aligned to the prevailing market rate then.

Last but by no means least, remember that all monthly debt obligations such as mortgage and credit card payments must fall below the Total Debt Servicing Ratio, which is 55% of gross monthly salary. However, HDB loans are not subject to TDSR rules.

Some tips to manage loan repayments would be:

   - Opt for a shorter loan tenure to save on interest but note that this would result in a higher monthly instalment;

   - Consider using cash upfront to reduce the loan amount;

   - Consider using some cash for the monthly instalment instead of only CPF savings;

   - Consider making partial capital repayments (PCRs) of the housing loan using your CPF and/or cash savings when you can afford.

D – Decision.

Make sure your decision-making process follows this path:

   - Calculate your available funds -> choose a home -> commit to buy

   - and not Choose a home -> commit to buy -> calculate your available funds.

Credit Counselling Singapore

Published 18 August 2023.