Congratulations, you’ve finally decided on your dream home! But it doesn’t stop there. Chances are, unless you’re really really rich, you’re going to need to take up a mortgage loan. Now, let us walk you through the basics of choosing the best mortgage home package for yourself.
It is important for you to first know what type of home loans are there available for you to choose from in the market. In Singapore, you can either get a HDB Concessionary Loan (HDB Loan) or a loan from financial institutions (bank loans).
Comparing HDB Loan and Bank Loans
As the name suggest, HDB loans is only available to those buying HDB flats. You have to fulfil certain criteria to be able to secure a HDB loan. At least 1 buyer have to be a Singapore citizen and your average gross monthly household income for families cannot exceed $12,000.
HDB loans are ideal for home buyers who do not have much cash on hand. This is because HDB loans require you to pay a smaller amount of downpayment (10% of your purchase price) as compared to bank loans (25% of purchase price). On top of that, you can pay the downpayment for HDB loan fully with either cash or your CPF Ordinary Account. For bank loans, you have to pay 5% in cash and the remaining 20% with CPF or in cash.
You can also borrow more from a HDB loan (90% LTV) as compared to a bank loan (75% LTV). LTV stands for Loan-To-Value Limit and it is the amount you can borrow to finance your home. A LTV ratio of 90% means that you can borrow up to 90% of your property value while the remaining 10% can be paid in cash or through you CPF.
That being said, HDB loans tend to have higher interest rates as compared to bank loans. The interest rate for HDB loans is pegged at 0.1% more the CPF OA interest rate. It is currently at 2.6% and has remained at this rate for many years.
Different types of bank loans
Bank loans can be used for both HDB flats and private property. There are 4 main categories of bank loans: Fixed Rate, Floating Rate, Fixed Deposit Linked Rate and, Board Rate.
A fixed rate home loan package is one where the interests rates are fixed and kept the same throughout a period of time, usually 1-2 years. You have stability as there are no fluctuations to the interest rate during this period and your monthly repayment does not change. However, fixed interest rates are higher than the other rates as banks factor in the risk that market rates increase beyond the rate they give you during this period of time.
A floating rate is one where the interest rate is pegged to the SIBOR (Singapore Interbank Offer Rate) or SOR (Swap Offer rate). You can read up more on SIBOR rates here. The interest rate is usually calculated using a 1M SIBOR or 3M SIBOR as a peg and adding a spread on top of it. These rates are usually more volatile as they will change depending on the peg that the bank set. For example, if you have 1-month SIBOR, your interest rate will change every month. The SIBOR and SOR rates are also publicly available, hence there is more transparency and customers do not have to worry about being charged an unreasonably determined rate set by the banks.
A fixed deposit linked rate are interest rates pegged to the bank’s fixed deposit interest rates. You can find more information here. Compared to floating home loan rates, FD rates are not as volatile. Another factor to consider is that banks have full control in determining the FD rates whereas no bank can control the SIBOR rate. This means that any changes to the interest rate you pay is done entirely at the discretion of the bank, without any external checks. However, banks are unlikely to increase the FD rate as it would mean that they have to pay more interest.
A board rate are interest rates completely determined by the banks. Banks tend to change their rates quarterly, making it less volatile than SIBOR or SOR pegged rates. However, they are much obsolete now because there is little transparency in the rates and the rates are often much higher. The way of determining the board interest rate is not disclosed to the public and this means that banks can change the interest rate that you anytime they want, without any external checks and balances!
Which type of home loan package is best for you?
It depends on what kind of person you are and your lifestyle.
A HDB loan is better for young couples who are just starting out in their career as you can borrow more money and have to pay a smaller downpayment amount. For banks loans, fixed rates are better for people who are risk adverse and wants to protect themselves against any further increase in their monthly loan repayment. However, if you are okay with some volatility, a floating home loan rate might actually help you save more money in the long run.
Still confused over which type of home loan to go for? Check out our comprehensive home loan comparison tool or contact us at +65 9845 9978 to book a free consultation with our experienced mortgage advisors!