Congratulations, you’ve secured your dream home! Now, you’re probably figuring out how to finance it. Chances are, you don’t have hundreds of thousands of dollars casually sitting in your bank account to pay for your home in cash. So, you’re probably trying to get a housing loan. But if you’re unfamiliar with the home financing process, choosing between a bank loan or an HDB loan can be daunting. Not only do you have to decipher mortgage terminology, but also learn about the types of loans on the mortgage market. Fear not, here’s what you need to know about getting a mortgage in Singapore.
Note: In Singapore, the terms “mortgage” and “home loan” are often used interchangeably, even though they are technically slightly different. In this article, we’ll do the same.
What is the difference between a fixed vs floating rate home loan?
First, you need to decide on the type of home loan you want. There are two types of loans: floating rate home loans and fixed rate home loans.
Banks and financial institutions offer both fixed and floating rate packages. For the HDB concessionary loan, there is a 2.6% interest rate (a rate pegged 0.1% above the CPF OA interest rate); this rate has remained unchanged since July 1999.
What are floating rate home loans?
Floating rate home loans are pegged to a benchmark interest rate like Singapore Overnight Rate Average (SORA). Floating interest rates tend to be more volatile as they fluctuate with market conditions.
However, there is also opportunity within this volatility. You could potentially take advantage of interest rate movements to score a competitive mortgage package in the market.
Hence, a floating rate home loan may be suited for those who have some risk appetite and are happy to constantly look out for the best mortgage deals available.
What are fixed rate home loans?
As the name suggests, fixed rate home loans offer mortgages with fixed interest rates.
Fixed rates are good for those who want the security of a fixed mortgage repayment sum every month. While fixed rate loans are more stable, the interest rates offered may be higher than the current floating rate loans.
Also, after the lock-in period for fixed rate loans is over, your interest rate will become a floating rate!
What are lock-in periods?
If you decide to go with a bank loan, you’ll need to pay attention to both the interest rate and lock-in period. Let’s start with lock-in periods first.
The lock-in period is the period of time which you are contractually bound to remain with your lender. Lock-in periods can last between one to five years; some bank loans have no lock-in period at all. During this time, you cannot refinance or reprice your home loan without incurring a penalty.
If you decide to end your home loan earlier than the agreed-upon lock-in period, you would have to pay a penalty of 1.5% of your remaining loan amount.
Home loan interest rates: Should you always go for the lowest interest rate?
Picking a loan with the absolute lowest interest rate seems like a no-brainer. But it’s not always in your best interest to gun for the mortgage package with the lowest interest rate.
Aside from the lock-in period, you’ll have to pay attention to the reference rate and the spread when picking a home loan. For most floating rate bank loans, it’s a good chance that you’ll take on a SORA-pegged loan.
What is SORA? Understanding the reference rate
Let’s say you go for a floating rate SORA package. Typically, you’ll find banks offering 1-month compounded (1M SORA) or 3-month compounded (3M SORA) rate packages. Effectively, you’re deciding between packages that determine how your mortgage package rates are ‘refreshed’, as per the compounded SORA rates.
For a 1M SORA package, your interest rates are renewed monthly – that means every month, your mortgage repayment amount will vary. Whereas for a 3M SORA package, your mortgage rates are renewed every quarter – this means your monthly mortgage installments will fluctuate every three months.
As of 6 February 2024, the 3M compounded SORA is 3.64%. Experts predict SORA rate movements to drop 3.25% by end 2024, which is good news for those who are on a floating rate home loan package.
What does a bank spread mean?
You may be wondering, “Why do banks charge a spread?” The short answer is the spread is how the bank makes money. If you pick a floating rate package with a 3M SORA + 0.50% interest rate today, your home loan interest rate will be 4.14%.
Banks often offer promotional interest rates initially and then increase the spreads after a few years. Hence, it’s important to work out how much interest you’re paying, especially for home loans with longer lock-in periods.
How much can you loan? Understanding LTV, MSR, TDSR
Now that we’ve covered the basics of mortgages, there are a few other terminologies you have to be familiar with.
These mortgage-related terminology affect how much you can loan:
- Loan-to-value (LTV) limit – how much you can borrow to your property’s value
- Total Debt Servicing Ratio (TDSR) – the proportion of your gross monthly income spent on all debt obligations (i.e. student loan, car loan, home loan, etc); the current TDSR threshold is 55%
- Mortgage Servicing Ratio (MSR) – the proportion of your gross monthly income that can be spent on your mortgage repayment for HDB flat and Executive Condominium properties; the current MSR is 30%
If you’re an HDB flat owner, you have the choice of taking on a bank loan or an HDB loan. Should you decide to go with a bank loan, you’ll have to consider both the TDSR and MSR.
With all the choices to finance your HDB flat, it can be quite overwhelming on whether you should go for an HDB loan or bank loan. To help you make an informed choice, here’s a breakdown of the difference between an HDB loan vs a bank loan.
HDB loan vs bank loan: Which is better?
| Factor | HDB loan | Bank loan |
| LTV limit | Up to 80% of the purchase price (or property value, whichever is lower) | Up to 75% of the purchase price (or property value, whichever is lower) |
| Downpayment | Minimum 20%; can be fully paid for using CPF OA monies | Minimum 25%; of which 5% must be paid for in cash |
| Mortgage interest rate | Fixed 2.6% | Can be fixed or floating, interest rates depends on market |
| Property and borrower eligibility criteria | HDB flats only; criteria include income ceiling and citizenship requirements | All property types; less stringent criteria, no income ceiling required, more dependent on credit score |
| Minimum loan amount | No minimum loan amount | Varies accordingly; usually $100,000 |
| Pre-payment penalties | No pre-payment penalties | About 1.5% |
Why choose an HDB loan?
If you’re a first-time homeowner, the higher LTV limit on HDB loans may be advantageous. You can borrow and put less money upfront for your downpayment which works for those who are not cash-rich.
Unlike bank loans, you can pay for your downpayment entirely with your CPF OA monies (subject to meeting the eligibility criteria). If you’re unsure how much of your CPF OA monies you can use, use the CPF housing usage calculator.
Taking on an HDB loan also means you are assured of fixed monthly repayment amounts and a stable interest rate of 2.6%. For those who want stability and are into long-term planning, an HDB loan works in your favour.
Why choose a bank loan?
However, be mindful that obtaining a larger loan also means having to pay more overall interest. While bank loans may require a higher downpayment, they may save you more money in the long-term.
And while bank loan interest rates are pegged to the market, you may be able to lock in a good deal if market conditions are favourable. Typically, most pick a bank loan when they find a more competitive interest rate on the market than the one offered by HDB.
Also, if you prefer a floating rate home loan, you can always refinance from an HDB loan to a bank loan later. However, one thing to note is that you can refinance from an HDB loan to a bank loan, but not from a bank loan to an HDB loan. So use your ‘one chance’ wisely.
Applying for an HDB loan
For those who decided on an HDB loan, there are several eligibility criteria. The best way to know whether you qualify is when you apply for your HDB HFE letter.
Upon completing the preliminary check and obtaining your valid HDB HFE letter, you will be informed of whether you are eligible for an HDB loan and the amount you can loan. Apply for the HDB HFE letter via the HDB Flat portal.
Applying for a bank loan
If you’re taking on a bank loan, you’ll need an In-Principle Approval (IPA). The IPA is a letter from the bank that states the loan amount they are willing to extend. Think of it as a pinky promise from the bank.
Once you get your IPA, you have about 30 days to exercise your Option to Purchase (OTP) before your IPA expires.
Guide to understanding mortgages in Singapore
Ultimately, pick the mortgage package most suited for your financial needs and goals. You don’t want to overstretch yourself at any given point.
You can use online mortgage comparison tools to get the latest rates from the market before you approach a bank. And if you’re still unsure which loan to pick, you can always speak to a professional.
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