Home Loan Repayment Tips – When you are browsing showrooms and talking to real estate agents, buying a house in Singapore seems like a breeze.
… Until you get to the funding section. Between all the financial jargon, millions of pros and cons to weigh, and the dreaded paperwork, it feels like you’re back at school cramming for your upcoming economics exam.
Home Loan Repayment Tips
There are so many questions that revolve around. Should you choose HDB or a bank loan? How much does it cost? And what is LTV, MSR and TDSR?!
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In this article, let’s systematically tackle the big meat mortgage problem by breaking it down into 5 practical issues:
If you buy an HDB flat, you can get a loan from HDB itself (we call this “HDB loan”) or any bank in Singapore (and we call this “bank loan”). To make your decision, consider these three factors:
If you are young and have no money, HDB loans are definitely attractive. But some other homebuyers choose to borrow from a bank to lower their future home loan payments and keep more savings in index funds for retirement.
With an HDB loan, your home loan interest is a standard 2.6% p.a. (based on the existing CPF rate of 2.5% + 0.1%), which has not changed in recent years.
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Bank loans, on the other hand, have different loan packages and therefore different interest rates. But one thing is certain: bank loans allow you to borrow at an interest rate lower than 2.6%. The savings can be huge if used in large quantities! And that can make you earn higher interest rates with your savings account.
Every bank offers various home loan packages at any given time. Here are the three types you will find:
Variable rate loans usually have lower interest rates than fixed rates, and homeowners can choose them for potentially lower interest rates than fixed rate loans.
Also offers a two-in-one home loan, allowing borrowers to enjoy the best of both worlds by having part of the loan amount at a fixed interest rate for peace of mind and also benefiting from a variable interest rate. package for the remaining loan amount.
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In short, bank loans can offer lower interest rates than HDB loans. The main trade-off is that you have to track your interest – it usually expires after two or three years. So from time to time you need to refinance your home loan (with the same bank) or refinance (choose another bank for your home loan).
That way, even if you initially opt for an HDB loan, you can still refinance the bank loan at any time to enjoy a lower interest rate.
The LTV ratio simply refers to how much the value of your future home can be borrowed against. For your first home loan, it’s 75% with a bank loan or 85% with an HDB loan.
But that doesn’t mean you can get all 75% or 85%, no question! That’s because when you apply for a loan, financiers will also look at your TDSR. TDSR is the portion of your income that goes towards all of your debt, such as car loans and student loans. With a home loan, the TDSR cannot exceed 55% of your gross monthly income.
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If you’re buying an HDB flat or executive condominium, there’s still another ‘R’ to consider: MSR. This is the portion of your gross monthly income that goes towards mortgage payments and cannot exceed 30%.
While all these rules and comparisons may seem confusing and restrictive, they are there to prevent us from biting off more than we can chew, ie.
Here’s how the total service ratio (TDSR) and mortgage service ratio (MSR) affect how much you can borrow. Note: MSR only applies to HDB/EC.
TDSR: With a TDSR of 55%, you can spend up to S$3,025 per month to pay off loans (all types).
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MSR: Since the MSR is 30%, you can spend up to S$1,650 per month on your HDB / EC home loan. (S$1,650 per month is included in the total loan plan of S$3,025.)
Oh yes, to calculate the loan limit above, you need to know how much your monthly loan payments are – this is easy to do with the help of a home loan calculator. The longer the loan term, the smaller and more manageable the loan installments will be.
Singaporeans have the option of using their savings in their CPF Ordinary Account to pay their mortgage installments – so should you pay back with CPF or cash?
Paying with CPF is definitely attractive if you need cash flow for daily expenses and investments. But you will be giving up high interest on your CPF money. When you eventually sell your house, you will also need to return the CPF OA savings you used to pay, along with the accrued interest.
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Instead, paying off your loan with cash allows you to maximize your 2.5% interest on your CPF OA savings. Not only that, you can pocket the proceeds from future sales – no need to top up your CPF.
As for repayment, it is also possible to pay off your mortgage in whole or in part – for example, if you have an unexpected windfall and want to roll over your mortgage. You may have to pay a small penalty fee if you do so, but it also saves your interest in the long run.
There is so much to digest and think about that you may want to take a few days to think about your home loan decision.
Once that is done and you have decided to proceed with the bank loan, the next step is to get an IPA (In-Principle Approval) for your home loan. This is a document from the bank stating how much they are willing to lend you, taking into account your TDSR, MSR, income and credit score.
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You must secure your IPA before paying the option fee for your home. That’s because if you find you can’t borrow enough to pay for the property, you won’t be able to get a refund of the option fee. In fact, some real estate agents require you to provide an IPA before they can proceed with the transaction.
The process to get IPA varies from bank to bank, but for , it is fast and simple. It only takes 10 minutes to complete and submit your application for permission in principle.
You can upload supporting documents to the portal at your own time after submitting your application. Once your IPA application is complete and approved, you can finally buy your dream home for real!
Check out MyHome to calculate the amount and find a home that meets your budget and preferences. The best part – it takes the guesswork out.
Loan Repayment Strategies
, so you are sure of how much you can borrow for your house, so you know your budget exactly. Paying off your mortgage early can help you get out of debt faster, save you interest, and ultimately let you live in the home that’s rightfully yours without having to worry about another mortgage payment. Sounds pretty good right?
Well, there are several different ways to take a break from your loan such as paying an additional lump sum, increasing your monthly payment, or even refinancing your loan for a short term if possible (not to mention one with a better interest rate). Not only can these actions help you shave years off the life of your loan, they can potentially save you thousands of dollars in interest!
While paying off your mortgage early certainly has many positives, it may not be the money option for everyone.
So before you decide whether or not to start paying off your mortgage early, there are a few questions you may want to ask yourself.
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Paying off your mortgage early seems ideal. The sooner you act, the lower the interest you will have to pay in the long run. Who doesn’t like saving money? However, remember that when you pay off your home loan early, you may incur some exit fees. Some lenders actually penalize you for paying off your mortgage early, and that can cost you thousands of dollars.
If you’re looking for a way to pay off your loan quickly, you might consider refinancing your loan to shave a few years off your loan term.
How quickly you can pay off your mortgage depends on your financial situation. Having a budget that prioritizes debt can be important for making smart money decisions because in most situations where you have multiple types of debt, your mortgage will usually have one of the lower interest rates. Having a budget that prioritizes debt can be important for making smart money decisions because in most situations where you have several types of debt, your mortgage will
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