How much should I borrow for my property?

Choosing a suitable and affordable mortgage loan is crucial in the process of buying a property. After all, it would impact up to 30 years of your life and could end up being a financial burden if not managed well. Yet, many overlook its importance amidst the flurry of hunting for the perfect property and numerous legal procedures to adhere to. Here are some guidelines when deciding on how much to borrow.

Down payment

A key consideration for most is the down payment required for the property. Banks have a myriad of considerations before offering mortgages, which may differ across individuals. If banks are offering lower loans, buyers will have to pay more using either housing grants, cash, or CPF. For young couples who have yet to horde much in their bank accounts, this might be a daunting amount to fork out. Therefore, the loan amount is crucial in determining which loan to take.

LTV

Generally, private banks offer a lower LTV compared to HDB housing loans. If you will be 65 years old or younger at the end of your mortgage tenure, most private banks are willing to loan you up to 75% of your Valuation Limit (VL), which refers to the lower property price or value at the time of purchase. This means that you would need to pay for the remaining 25% of VL.

On the other hand, HDB loan offers a higher LTV of 85%, which would amount to a 15% down payment that could be financed using CPF, cash, or housing grants.

Mortgage Servicing Ratio (MSR) & Total Debt Servicing Ratio (TSDR)

In addition to the LTV, banks also consider your financial health by using Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TSDR) for HDB flats and private properties, respectively.

Essentially, your potential mortgage liability must be < 30% of your income and all your monthly instalments must be < 55% for HDB Loan. If you are borrowing for Condo & Landed, all your monthly instalments must be < 55%.

Before you balk at the sum the down payment amounts to, do consider financing your initial payment using your CPF or using housing grants.

Grants

If you are a Singaporean looking to purchase a resale HDB flat with your spouse and both of you do not own any other property, you may be eligible for HDB Grants. CPF also offers housing grants of up to 80,000 for first-timer applicants for new HDB flats.

CPF

You can use CPF Ordinary Account to finance your monthly mortgages and pay part of your down payment after you have paid the minimum cash down payment of the Valuation Limit (VL), and Cash Over Valuation (COV), if any.

CPF can be used to pay off your mortgage up to a maximum of 120% of the VL. However, using CPF to finance your home loan also means that you would have to repay CPF the drawn amount and accrued interest at 2.5% upon the sale of your HDB flat. If your monthly contributions to your CPF OA can cover the instalments and any other commitments, you may want to use this to pay for your property. After all, your CPF OA is created for this very purpose.

Therefore, before considering the interest rates, you must ask yourself – do I have the money for the down payment if I take up this loan?

Cash Requirements

However, even if CPF and housing grants could theoretically cover the initial payment, you may need to pay part of the down payment if there is a difference between the property value and property price.

Cash Over Valuation (COV) refers to the difference between the valuation price and transacted price of the property differs and must be paid in cash.

Example:

Purchase price = $400,000

Valuation = $350,000

Cash over Valuation (COV) = $50,000

Loan Tenure

When comparing loans, another important factor is to consider the loan tenure. Generally, banks are willing to offer longer loan tenures to younger borrowers. But if you have a choice, which is better?

If you are repaying your mortgage loan over a longer period, monthly instalments will be lower and more affordable. Although this is a good model for those looking for liquidity, it may be undesirable for those looking to minimize the cost of borrowing.

Loan Structure

Last but not least, loan structures have a big impact on your monthly mortgage payments. Banks usually offer loans with fixed interest rates or floating interest rates, which refers to reference rates including Singapore Overnight Rate Average (SORA).

In contrast, HDB Concessionary Loan offers 2.6% interest rate until further notice. Although private banks often offer “fixed interest rate” mortgages, these interest rates are fixed for a few years before pegging it to SORA, or the bank’s board rate. While floating interest rates help to combat inflation, volatile rates may result in a significant surge in monthly mortgage instalments which may no longer be affordable.

In addition, some banks include extra charges on top of interest rates that result in the loan being more expensive than they appear to be. Before choosing your loan, it is important to be aware of any opening or closing costs as well as prepayment costs – which are penalties applied by the bank for those who choose to repay their loans earlier than tenured. Hence, you should look beyond the interest rates, and remember to read the fine print!

Although it may seem daunting to choose the perfect loan among all your options, the most important consideration should be the affordability of the loan. Having a clear understanding of how much down payment you can afford alongside your preference for loan structures and loan tenures may help you to make a more informed decision in your financial planning.

Colin Lim
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