Singapore is ranked as one of the world’s highest cost of living and not surprisingly, we are among the top 10 most expensive cities to buy a property. Yet, it seems to be a given that most Singaporeans are home-owners. How is this possible? Well, this is because almost all of us are saddled with mortgage loans for a good 20 to 30 years of our lives.
Since buying a property is a huge financial commitment, it pays to understand the jargon and terms often associated with it so that you know what you are paying for. Here are the top 15 terms and acronyms you’re likely to come across as you prepare to take out a home loan:
1. In-Principle Approval/Approval-In-Principle
Approval-In-Principle (AIP) is a non-binding pre-approved loan amount given by the Bank based on your credit score. This amount indicates how much you will be able to borrow so that you can focus on properties that you can afford and not waste time viewing those that are out of your budget. The AIP/IPA is usually valid for 30 days.
2. Interest Rate
Interest Rate is the cost of taking out a mortgage loan. For home loans, they are usually classified as fixed, variable or board rate.
A fixed rate loan charges the same rate of interest throughout the loan tenor.
A floating rate loan offer rates that reset periodically to match the benchmark it is following. You may want to ask the bank about the calculation of the floating rate as not all banks are transparent when it comes to using their internal board rate.
3. Loan Tenor
Loan tenor refers to the number of years it will take to repay the loan.
4. Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) ratio is calculated by dividing the amount of the mortgage by the value of the home. LTV may be up to 80% if you do not have any other outstanding loans.
5. Singapore Interbank Offer Rate (SIBOR)
Singapore Interbank Offer Rate (SIBOR) refers to the rate at which banks in Singapore lend/borrow funds from each other. It is calculated daily based on the average cost of borrowing funds in the interbank market for one, three, six and 12-month maturities. It is quite common for banks in Singapore to use the SIBOR as a benchmark to price their home loans. Your home loan rates will usually include a spread that the bank adds on top of the SIBOR rate.
For instance, the SIBOR might be at 1.2% now and the spread is 0.1% from the bank, making your the interest chargeable at 1.3%. One advantage of using a SIBOR-rate loan is that it is transparent as the data is publicly available.
6. Swap Offer Rate (SOR)
Another commonly used benchmark rate to price home loans is the Swap Offer Rate(SOR). Comparatively, it is more volatile compared to the SIBOR as it takes into consideration the exchange rates between the US dollar and Singapore dollar. However, borrowers may take up a SOR-rate loan in order to take advantage of bigger declines in interest rates if they feel that the rates are on a declining trend.
7. Mortgage Servicing Ratio (MSR)
The MSR is the percentage of your total monthly income that you are allowed to use for the monthly home loan repayment. As part of the cooling measures set by the Monetary Authority of Singapore(MAS) in 2013, the MSR is capped at 30 percent. You should figure out your LTV and MSR before you take up a home loan as it will determine your loan quantum. Do note that the MSR only applies to bank-issued loans for the purchase of HDB flats.
8. Total Debt Servicing Ratio (TDSR)
The TDSR is another cooling measure similar to the MSR that limits the amount of money that banks can lend you. The difference is that outstanding debts are factored in as well – credit card debts, car loans, personal loans. This effectively means you you’ll need to discount this from your monthly income before accounting for the 60% limit.
9. Lock-in Period
The Lock-in Period for a home loan refers to a set number of years that the borrower will have to stay with the terms of the loans, after which he/she will be penalised for changing the terms of the loan contract. Banks typically offer a more attractive interest rate for the first few years of the loan in order to attract borrowers to stay with the loan package.
10. Refinance/ Repricing
Typically after the first few years of your loan where you no longer enjoy the lower rates, market interest rates might have moved to be more favourable compared to the rates you are currently paying on your loan. Refinancing refers to applying for a new loan to replace the existing home loan for a more attractive rate. You should aim to refinance your loan after the lock-in period so that you do not incur any pre-payment penalties.
Repricing is a similar concept but rather than applying for a new loan with another bank, you ask for a better loan package from the existing bank.
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