If you’re considering a home loan with a bank, here are some key questions to ask.

Purchasing a residential property is the biggest financial commitment most people will make in their lifetime. When making such a big decision, it’s important to be aware of the way banks assess the amount you can borrow.

All banks should provide prospective loan applicants with a Residential Property Loan Factsheet. This will provide you with an overview of all the relevant key features and obligations.

To properly assess your financial situation, you can use our affordability advisory tool or speak to a mortgage specialist, who can help you to decide the best way forward.

Are you eligible?

All banks have eligibility criteria every mortgage applicant must meet. For people who are self-employed or who do not receive a regular income, there are additional criteria to meet. While the basic criteria set out in regulations are uniformly practised, there can be some variations between different products and banks.

Factors impacting your loan amount include:

• Age
• Income
• Banks’ internal credit requirements
• Property regulations

Residential property loans are governed by regulations. A key factor in determining your loan amount is the Total Debt Servicing Ratio (TDSR), which is used to establish whether you can realistically afford the monthly repayments. You can use our tool to estimate how much you are able to borrow.

What is Total Debt Servicing Ratio?

The Total Debt Servicing Ratio or TDSR is a framework designed to take into account your gross income and all your existing financial commitments to establish how much you can borrow. It applies to any loan secured by property purchase, including refinancing loans.

You will need to provide details of all your financial commitments, including:

• Car loans
• Credit cards
• Other property loans
• Details of any loan you’re a guarantor to

All of your monthly instalments are then added together to give your total monthly debt obligation.

The bank will also need to establish your gross monthly income. This is calculated by combining any employment (excluding employer’s CPF contribution) or self-employment income (before tax deductions) with all other regular sources of income.

The other sources of income can include any rent you receive from an existing property and variable income such as a monthly bonus or commission. Some financial assets can also be converted into an income stream to be recognised. Variable income is assessed over the preceding 12-month period and is subject to a reduction to ensure you stay within your means.

Any variable sources of regular income will need to be supported by paperwork, such as a stamped and signed tenancy agreement, with minimum 6 months remaining rental period for rental income. The supporting material should be submitted to your bank along with your latest statement from IRAS and the CPF Board.

Under the TDSR framework, the bank must ensure that your expenditure for all debts, including the proposed home loan, does not exceed 55% of your monthly gross income.

You will also need to provide a written declaration confirming all your debt obligations and sources of income are included.

Does Mortgage Servicing Ratio apply to you?

If you’re purchasing a HDB flat or executive condominium from a property developer, then Mortgage Servicing Ratio (MSR) will apply. The MSR provides a set percentage of your gross monthly income that the monthly mortgage payments must not exceed, i.e. MSR must be within 30%.

What does LTV mean?

LTV stands for Loan-to-Value Ratio. This is the percentage of a property’s value a bank will allow you to borrow against. If your bank offers an LTV of 75%, you can borrow up to 75% of either the purchase price or current market value, whichever is lower.

The LTV can vary depending on the tenure of the loan, the age of the borrowers, and whether you have any existing home loans that are going to run concurrently with the new one.

Pick the best package for you

Once the bank has all the relevant information, it can provide you with an Approval-In-Principle (AIP). It’s non-binding, but it does provide you with a close indication of the amount you can borrow.

At any given time, banks may run promotions. Don’t be swayed by the short-term pay-off. Look at the underlying conditions of every offer to ensure you pick the right one.

You should compare:

• Fees – Cancellation fees, early repayment fees
• Interest rates – How does the rate offered compare to others? Is it a fixed or bank-managed rate?
• Lock-in period – Are you tied to the bank for a defined period of time? How will they penalise you if you pay off your loan early?
• Mortgagees Interest Policy (MIP) – This is compulsory for some banks.
• Extra savings – Banks work with partners who may offer good value on conveyancing fees, valuations, and some types of insurance

Fixed, bank-managed or market-pegged rate?

There are three main types of mortgage pricing, fixed rate, bank-managed rate or market-pegged rates.

Fixed Rate vs Bank-Managed Rate vs Market-pegged Rate

Pick the best package for you	Bank-Managed Rates	Market-Pegged
Interest rate is fixed for a predetermined amount of time Gives you peace of mind knowing what your monthly payments will be for a set number of years Usually linked to the prevailing interest rate at the time the loan is made, making this pricing favourable when rates are low Once the fixed rate period ends, your loan automatically switches to a bank-managed rate While this interest rate is often slightly higher than a bank-managed rate, you get peace of mind knowing the amount and duration of your monthly payments	Bank-managed rates are set by the bank and do not fluctuate with the market Generally known as Mortgage Board Rates or Board Rates Bank-managed rates require banks to give 30 days’ notice of changes Typically lower than a fixed rate	There are 3 market-pegged rates in Singapore currently, Singapore Overnight Rate Average (SORA), Singapore Interbank Offered Rate (SIBOR) and Singapore Swap Offer Rate (SOR). SOR will be discontinued after end-2021, and SIBOR will potentially be phased out from end-2021 to 2024. The industry is undergoing transition into a SORA-centered SGD interest rate market (view MAS' webpage on SORA). SORA and Compounded SORA values are published by MAS on all business days on MAS’ website.

The bank can make changes to the terms and conditions of your home loan at any time during the tenure. Under normal circumstances, most banks will write to you approximately 30 days in advance.

If you want to vary the loan for any reason, such as to refinance or repay your loan, you must also notify the bank in the manner stipulated by the bank.

What’s next?

The next step is to start talking to a mortgage specialist. Home loan rules and pricing can be complex, which is why mortgage specialists are here to help you out. They’ll look beyond the interest rates and compare aspects that might seem insignificant now, but can be important later on.

Buying a house can be a stressful process. A good mortgage specialist will make the process as fuss free as possible for you.

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For more information, read the guide to home loans published by the Association of Banks in Singapore and MoneySENSE, “What You Should Know about Housing Loans – Key Questions to Ask the Bank Before Taking a Housing Loan” (PDF, 1.6mb).

Article was originally published on 18 August 2020.