Buying a home is a major decision – one that requires a great deal of preparation and knowledge so that a borrower can navigate the loan process with minimal difficulty. But if we choose to take out a loan in order to buy a home, what details should we keep in mind with regard to borrowing money?
In this article, we shed light on the factors that affect how much you can borrow for a home loan in Singapore, and dive into some considerations that may influence your financial health and overall liability.
Before taking up a home loan, it’s best to consider the state of your finances; what you can afford will come down to your income, expenses, debts, and savings. There’s a lot to juggle here, so let’s take a quick look at some of the miscellaneous costs of a home loan.
In addition to a down payment, you’ll need to make an upfront payment for option fees, buyer’s stamp duty (additional buyer’s stamp duty in case it’s a second property), legal costs, agent’s commissions and fees, and other miscellaneous expenses.
The size of the down payment will vary based on the value and type of property, the loan-to-value limit (which we’ll cover later in this article), and any outstanding loans.
In addition to monthly mortgage repayments, you’ll also want to budget for recurring costs such as maintenance fees, utilities, conservancy charges, property tax, and other costs.
On top of these upfront costs and recurring payments, you’ll need to take into account some rules regarding home loans. These have been established by the national government, and include rules on loan tenure, Loan to Value Limit (LTV), Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR). The purpose of these rules is to protect Singaporeans from crippling debt.
All of these factors will affect the amount of money you can borrow for a home loan.
Loan tenure refers to the duration of time it takes to pay the entire loan amount using monthly instalments. In Singapore, the maximum loan tenure for housing is 30 years for Housing and Development Board (HDB) flats, and 35 years for non-HDB flats.
How this affects the maximum amount of money a borrower can get depends on a number of factors such as the borrower’s age (with a special calculation done for joint borrowers), the loan tenure as described above, the type of property in question, and the existence of other housing loans.
A Loan to Value (LTV) limit is a restriction set on the maximum amount of money an individual can borrow for a home loan from a financial institution such as a bank or lender. This limit is based on a percentage of the property’s value. For example, an LTV of 70% allows you to borrow 70% of the property’s value.
LTV limits are calculated based on the number of outstanding housing loans a borrower has, and the minimum down payment they are willing to make. Generally speaking, if you have more outstanding home loans, you will be able to borrow less money and will have to make larger down payments.
It’s also important to note that there are regulations in place regarding residential property loans. There are several conditions under which a bank will not be permitted to grant a loan for the purchase of residential property; for example if the borrower does not pay a certain amount as a down payment, or if the vendor is using an interest absorption scheme to change the way payments will be made.
A Mortgage Servicing Ratio (MSR) sets a limit on the amount of money you can borrow and pay back on a monthly basis. To be specific, your mortgage payments cannot exceed 30% of your monthly income. This rule helps ensure that you’re not spending too much of your monthly income on repaying your mortgage loan. MSR only applies to HDB flat loans and executive condominiums for which the minimum occupation period (MOP) has not expired.
Total Debt Servicing Ratio (TDSR) is a measure of the portion of monthly gross income that goes towards paying existing loans, including the one being applied for. This measurement was adopted to protect Singaporeans from borrowing beyond their means. The Monetary Authority of Singapore states that TDSR should not exceed 55% of the borrower’s monthly gross income.
Note, however, that restrictions based on TDSR calculations do not apply to moneylenders such as Friday Finance. This is because we are regulated by the Registrar of Moneylenders of the Ministry of Law in Singapore, rather than by the Monetary Authority of Singapore.
At Friday Finance, we are driven by a mission to make borrowing as stress-free as possible. We have a wide range of loans with flexible repayment terms designed to cater to professional and personal needs, from life-stage loans to startup loans and income advances. Learn how you can start your application here.