Business Times Property 2013 : Housing Loan Tips by HousingLoanSG.Com on 28 Feb 2013 |
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Other than imposing higher additional buyer’s stamp duty (ABSD) rates for the purchase of residential properties, reducing borrowing limits and increasing the cash downpayment, MAS has also introduced new rules governing loans for Housing and Development Board (HDB) flats. One of the rules states that if a buyer takes a housing mortgage from a financial institution for the purchase of a HDB flat, the mortgage servicing ratio (MSR) is capped at 30 per cent of the borrower’s monthly income. MSR is the proportion of a borrower’s gross monthly income going towards home loan repayment only.
Other than calculating the borrower’s debt servicing ability, banks will also conduct checks on the repayment record of your other personal loans (including car loans, renovation loans and credit lines) as well as your credit card payments for the past 12 months. These can be obtained from the Credit Bureau. Searches will also be done to check for any legal suits against you.
Generally, banks will ask for income documents from all applicants for a housing loan. For salaried employees, banks will require the latest payslip and tax assessment as well as the latest 12-month CPF contribution history statement. For the self-employed or for those whose income is purely commission based, the latest two years’ tax assessments will be requested.
For property buyers without the standard income documents required by banks – for example, those who are in between jobs or self employed for less than two years – applying for in-principle approval will give them more time to prepare for any additional documents that may be required by banks.
Home buyers are also cautioned by MAS to prepare for possible increases in interest rates. The present low interest rates may create the misconception that properties are affordable. However, we cannot assume that interest rates will stay at the current level forever.
Most of the home loan packages offered in the market currently are pegged against the three-month Singapore Inter-bank Offered Rate (Sibor), which has been below one per cent since 2009 and is likely to remain low for the next one to two years. However, historically, Sibor hit as high as 4.5 per cent on average during the Asian Financial Crisis of 1997-1998.
The housing loan rates that banks offer to home buyers are higher than Sibor as banks will add on a mark-up. The mark-up ranges from 0.75 to 1.5 per cent currently (as at Feb 18, 2013). Based on the three-month Sibor of 0.38 per cent as at the same date this will translate into a home loan rate of about 1.13 to 1.88 per cent. If Sibor were to increase to 4.5 per cent, the home loan rate will be higher, at 5.25 to 6 per cent instead, after adding the mark-up. Based on the current interest rate of about 1.1 per cent for a 30-year loan of $500,000, the instalment works out to be $1,631 per month. If the interest rate rises to 2 per cent, the monthly instalment will go up $217 to $1,848. The increase in instalment can be as much as $1,367 per month if the interest rate increased to 6 per cent. However, if the loan quantum were to double to $1,000,000, the additional payment per month will double as well.
No one will know how high interest rates can rise. When it happens, would you have sufficient cashflow to sustain the increase in interest rates, bearing in mind that housing loan payment is just one of your many other financial commitments?
It is therefore important to start right by ensuring that we do not over commit. As a last “defence”, we should also set aside sufficient funds equivalent to around six to 12 months of the monthly home loan payments. This is not only to prepare for possible hikes in interest rates, but to safeguard against any unforeseen circumstances.
Variable rate, as the name implies, means the rate is subject to changes any time. For example, if the package is pegged to three-month Sibor, this means the interest rate will be re-set every three months. At the end of each three-month period, depending on what the Sibor is, you may be paying more or less accordingly. These variable-rate packages will be suitable for borrowers who are of the view that interest rates will remain low in the short term and are comfortable with fluctuations. Currently, you can enjoy a lower rate of about 1.13 per cent.
Another reason some borrowers opt for variable-rate packages is the flexibility of making full or partial repayment of the loan. Some of these variable packages do not impose any lock-in period where you are penalised for any premature exit from the packages.
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