What are Home Loans?
A home loan is a secured loan, taken from the bank to buy your house. The collateral (security) of the home loan is the house itself.
Home loans are also referred to as housing loans or mortgages.
0:60: Know How Much You Can Borrow
For your first home loan, banks will usually lend you 70% – 80% of the property’s value.
Of the remaining 20%, up to 15% can come from your CPF. The remaining 5% must be paid in cash.
In addition, the maximum loan is capped by your Debt Servicing Ratio (DSR). Most banks will tolerate a maximum DSR of 40%: That means the monthly home loan repayment, along with existing loans (e.g. your car loans and personal loans) must not exceed 40% of your monthly income.
0:50: Get Approval-in-Principle
Approval-in-principle (AIP) is a document from the bank. This is the bank’s promise to loan you up to a stipulated amount, provided you buy a house within a certain number of days.
You can get AIP for free from any bank. Use services like SmartLoans.sg, to find out which banks you should apply with. Always make sure you have AIP before you make a deposit on a house.
0:40: Choose Fixed or Floating
A fixed rate home loan means your monthly loan repayments don’t change. Most fixed rate packages last three to five years, after which they revert to floating rates. Note that in Singapore, banks do not offer perpetual fixed rates.
A floating rate home loan is revised constantly (usually every month, or once every three months). Monthly repayments may be higher or lower upon revision.
0:30: Decide on SIBOR, SOR, or IBR
Home loans interest rates (and hence monthly repayments) fluctuate according to three indexes: SIBOR, SOR, or an IBR.
SIBOR (Singapore Interbank Offered Rate) is the most common index for home loans. The information is public, government regulated, and can be checked on Teletext.
SOR (Swap Offer Rate) is based on foreign exchange rates (US Dollar and Singapore Dollar). It is more volatile than SIBOR, which means SOR movements can result in huge savings… or huge loan repayments.
IBR (Internal Board Rate) means your home loan interest fluctuates based on the bank’s internal decisions. This rate may not be visible to the public, and is regulated only by the bank in question.
Ideally you should choose between SIBOR-based and SOR-based loans, which are more transparent and not subject to the banks’ discretion.
0:15: Shop for the Best Rates
At any given point, one or two banks will have lower home loan interest rates than the others.
As the banks reach their target, their rates will gradually rise. So it’s important to track the market, and know which bank is charging the least this month.
You can do this manually (visit the banks and ask), or through free loan comparison sites such as SmartLoans.sg.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.