Housing loans demystified

DENNIS NG explains what the latest changes in property financing are and what they mean to you

Published September 23, 2010
DENNIS NG

WHAT is the outlook for interest rates? How will the latest changes in property financing affect you? Fret not, this article will help guide you in the right direction.

From Aug 30, 2010, regardless of whether you're a Singaporean, permanent resident or foreigner, if you have an existing housing loan on a property - whether the property is in Singapore or overseas - the maximum financing you can get for your property purchase has been revised downwards to 70 per cent from 80 per cent previously.

And also from Aug 30, 2010, if you have an existing housing loan, and if you want to purchase another property, the minimum cash downpayment has been revised to 10 per cent from 5 per cent previously.

Thus, if you have an existing housing loan and are thinking of buying a property, it is time to re-work your numbers. And you might need to put off the decision to buy a property for the time being if you do not have the required minimum 30 per cent downpayment for the property, as the maximum financing has been reduced to 70 per cent.

However, if you have an existing property that is fully paid, and have no outstanding housing loan, and if you buy a property, you can still get up to 80 per cent financing. The above measures on the cash downpayment and 70 per cent financing limit apply to all property purchases with date of option to purchase dated Aug 30 or later.

How does it affect upgraders and people in the process of selling their property?

The government's main intention of introducing this new measure is to deter speculation in property. However, it can affect upgraders and people in the process of selling their existing property.

For instance, if you have an existing property which has an outstanding housing loan, but want to buy a new condominium project to be completed in a few years' time, you can only get maximum 70 per cent financing.

Those with plans to move are affected as well. If you plan to move to a new home and you purchase the new home before you sell your existing home, and if there is an outstanding loan on your existing home, you can only get a maximum of 70 per cent financing for your new home.

For those who have sold their property but the transaction is not completed yet, they might be affected as well.

In order to qualify for 80 per cent financing, homebuyers must prove the sale of their existing home to get the 80 per cent loan. For HDB flats, this requires an approval letter from HDB to the seller within two weeks from the date of the first sales appointment, which typically is about one to two months after the date of option to purchase.

For private properties, a signed sales and purchase agreement is required as proof, and a certificate from Iras showing that the stamp duty has been paid by the buyer of the existing home.

Types of housing loan packages available

With the recent entry of new players into the market, such as ANZ Bank and CIMB Bank, there are currently altogether 16 financial institutions that are active in providing housing loans in Singapore.

Each financial institution offers five to 10 different home loan packages. Thus, at any point in time, there are easily over 120 different housing loan packages available for you to choose from.

Housing loan packages with interest rates pegged to Sibor and SOR were only introduced since 2007.

Over the last three years, as interest rates remain low, and with more consumers aware of the availability of such packages, there seems to be a trend of more people choosing a housing loan package pegged to Sibor or SOR instead of floating rate packages, with interest rates pegged to bank board rates.

The reason for this is Sibor and SOR are transparent and are average market interest rates and are not subject to unilateral changes by individual banks, but each bank has its own discretion in determining the board rates.

Which is the best housing loan package?

Because of competition, banks change their housing loan packages very often. Furthermore, other than interest rates, banks vary their other terms and conditions, such as the penalty period, which varies from zero penalty period to three years' penalty period; penalty fees, which might vary from one per cent to 1.5 per cent; flexibility in making partial repayment within the penalty period; number of years of free fire insurance provided; amount of legal subsidy provided; etc.

A common misconception is that consumers might think there is such a thing as a best housing loan package.

The fact is, different home loan packages are suitable for people with different needs and priorities. Thus, there is no one-size-fits-all solution. You need to choose a housing loan package that is most suitable for you.

In this aspect, instead of trying to check with different banks on the different home loan packages available, which can be very confusing to consumers, a better choice might be to talk to an independent mortgage consultancy, who will, based on your needs and priorities, help you shortlist a few of the housing loan packages that are most suitable for you.

This service is provided free to you as a consumer, as the mortgage brokers are separately paid a fee by the banks for the service they provide.

Outlook for interest rates

Sibor (Singapore Interbank Offered Rate), the average interest rate banks borrow/lend money to one another, is used as a guideline by banks in setting interest rates on housing loans.

Currently, Sibor is at its lowest level. The three-month Sibor (as at Sept 3) was 0.543 per cent while the SOR (Swap Offer Rate) was at 0.308 per cent. SOR is basically Sibor + US$ swap cost into S$ rates, it involves swapping US$ into S$. Thus SOR is also affected by the volatility of the exchange rate of US$ versus S$.

In turn, Sibor is affected by mainly two factors. Namely, the US Fed interest rates and the liquidity of the Singapore banking sector.

Given that the US economy remains weak, it is likely that the US will continue to keep interest rates low for the next six to 12 months. And given the ample liquidity in Singapore's banking sector, it is likely that Sibor, and thus housing loan interest rates, will remain low in the next six to 12 months as well.

Outlook for housing loans market

This year saw the entry of two new players to the housing loan market, namely CIMB and ANZ Bank, which makes the already competitive housing loan industry even more competitive.

This is indeed good news to consumers as competition typically results in better and more competitive home loan offers from banks.


The writer is an accountant by training with 17 years of bank lending experience. In 2003, he set up www.HousingLoanSG.com, an independent mortgage consultancy portal

Source: http://www.businesstimes.com.sg