Making Sense of Mortgages

By Lui Su Kian, Managing Director and Head, Deposits and Secured Lending, DBS Bank.

Over 80% of residents in Singapore live in a HDB flat. In 1H 2014, over 21,000 new and resale HDB flats were booked. A large proportion of these homebuyers also took a direct loan from HDB at the concessionary rate of 2.60% despite the current low interest rate environment. This is in part due to concerns over the rise of interest rates in the future.

Homebuyers should understand that the HDB concessionary rate is pegged at 0.1% above the prevailing CPF Ordinary Account (CPFOA) interest rate, which is currently at 2.50%. This is not a guaranteed rate for the duration of the loan as the CPFOA rate is also subject to market conditions, although its movements tend to be less frequent than that of market interest rates.

At 2.60%, the HDB concessionary rate is higher than what most banks are offering for fixed rate mortgages. Hence, it is prudent to consider HDB flat financing from financial institutions such as banks alongside HDB Board’s Concessionary Loan package to determine the financing solution that best suits your needs.

For private property homebuyers, there is a plethora of financing options out there. From traditional floating rates and fixed rates to increasingly innovative loans offering never-before seen levels of customization, current day homeowners are truly spoilt for choice. If low rates are your thing, a floating rate package, which are generally priced most affordably, will ensure the leanest of loan bills. If stability is what you seek most, fixed rates guarantee constant loan repayments for absolute peace of mind but generally come with a lock-in period charging a fee for early prepayments. Fixed rates will be higher than the floating rates.

Besides straightforward loan options, there are also loan packages which blur the traditional lines between fixed and floating rates. For instance, there are floating rate loans that come with a cap on maximum interest chargeable, effectively turning them into a fixed rate loan, but offering flexibility such as prepayment and the opportunity to reap interest savings when rates are low. Having an interest rate cap in place keeps your actual interest expense from spiralling out of control in a rising interest rate environment. One such example is the POSB HDB Home Loan, a floating rate mortgage which provides HDB homebuyers with the security of having interest capped below HDB concessionary rates for 8 years.

Homebuyers should also be aware of the different benchmarks loans are pegged to and understand how they react to market conditions. Presently, most mortgages in Singapore are pegged to Interbank benchmarks such as SIBOR and SOR or board rates. In 2014, DBS introduced a new benchmark, the Fixed Deposit Home Rate (FHR), which is the first home loan pegged to the Fixed Deposit Rate.


In addition to alternative financing options, homebuyers should also understand how the property guidelines introduced within the last few years affect them and the resources that are available to them when they are purchasing a new property.

1)     Total Debt Servicing Ratio (TDSR)

 

TDSR =

Monthly total debt obligations

X 100%

Gross monthly income

 

While there are a few exemptions, generally, the TDSR of the borrower must not exceed 60%. Elements that taken into consideration for the monthly total debt obligations include monthly installments for loans and the minimum amount payable for credit cards or credit lines. The borrower must present the latest available statements including for credit cards or credit lines that are infrequently used. Banks will review the borrower’s credit ratings as well as any existing financial commitment.

2)     Cash Outlay and CPF Reserves

It is a requirement, when financing your flat with HDB, to fully utilise the balances in your ordinary account towards initial downpayment. This is a condition on top of the 10% downpayment required for HDB financing. For bank financing, there is no such requirement to sweep your CPF ordinary account balances. For an 80% Loan-to-Value bank loan, the initial outlays required are the 5% cash downpayment and the remaining 15% which can be paid by CPF. We recommend keeping a balance of CPFOA reserves to act as a buffer of emergency funds to mitigate against a loss of repayment capability.

3)     Financing Preferences

Note that there is generally variance between the maximum loan amounts granted by banks and by HDB. This is due to differences in the limits placed on the maximum percentage of purchase price or valuation permitted to be loaned and also limits on the percentage of income usable for loan servicing (Total Debt Servicing Ratio). However, there is no need for homebuyers to be caught up in the technicalities. They can simply approach the bank for a home loan eligibility or approval-in-principal evaluation to proceed with their selected unit.

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