Taking a home loan amid rising interest rates

A residential property is the biggest financial asset most of us will own. Before purchasing a property, it is important to know how much you can borrow, understand the types of mortgage packages available, and what your options are when interest rates rise.

How much can you borrow?

There are several online resources that can help you calculate how much you can borrow from a bank based on the total debt servicing ratio (TDSR) framework. Portals and other tools can compute your affordable property price range factoring in the down payment, stamp duty, minimum cash payment as well as legal and agent fees.

It is advisable to use a tool which takes into account your available cash and CPF funds and also includes your financial assets in addition to your income, before generating a shortlist of properties within your affordability range.

Some tools also provide the rental yield for a potential investment property as well as work out the indicative bridging loan amount you will require if you are selling your current home and awaiting proceeds to make the down payment for your new home. In your affordability assessment, do take into account your other financial needs and plans such as saving up for your children’s education, medical expenses and building your retirement nest egg, so that the cash and CPF amount used in your assessment excludes these immediate and future commitments.

Your Credit Bureau Report

If you have various loans in Singapore, it is a good idea to purchase a copy of your credit report as this has been enhanced from August 2018 to reflect detailed monthly instalments of all your property and non-property loans.

This is useful information as banks rely on credit bureau data in the TDSR assessment. You may purchase your report for S$6.42 at www.creditbureau.com.sg.

Banks’ eligibility criteria

The next step would be to speak to a mortgage specialist who can further address other concerns and guide you on your loan application.

While property regulations govern the loan amount to be granted, tenure and other loan specifications, banks have in place their own internal credit criteria such as your age, income, financial assets, employment type, debt obligations and credit history that will impact the final loan amount approved.

Which pricing package should I pick?

Home loan pricing packages are based on interest rates that reference a benchmark, also known as a reference rate. There are three main categories of reference rates and their pros and cons are listed in the table.

How can I better manage my mortgage when interest rates rise?

Since early this year, many banks have adjusted bank-managed rates up in view of rising funding cost which is reflected in the higher market rates. If you have a mortgage, you may consider one of the following options:

  • Pay down your mortgage with cash or CPF funds. Generally, banks require one month’s notice for partial prepayments and three months’ notice for full redemption.
  • Review your existing pricing package. Check the lock-in period of your loan which is generally two to three years from your loan disbursement. During the lock-in period, there will be a penalty levied for changing the pricing package, also known as “re-pricing”.

Banks also charge an administrative fee of up to S$1,000 for re-pricing. If your loan interest rate is higher than the prevailing re-pricing package and your loan lock-in period is over, you can initiate a request to re-price your loan.

  • Consider re-financing of your home loan with another bank if there are clear savings to do so. However, do review the interest savings against the cost of moving to another bank as there are legal fees, valuation fees and penalty charges.

In addition, if you had received subsidies, you will be required to pay back the subsidy amount if the loan is redeemed within the stipulated clawback period, which is generally 36 months. Also, note that as market rates move up, all banks will adjust their bank-managed rates upwards and the interest savings may not be worthwhile.

Additional matters to note when re-financing your home loan:

  • TDSR evaluation is required for investment properties and term loan portion on owner-occupied properties.
  • Loan-to-value (LTV): Check the maximum LTV that can be granted which depends on whether your property is an owner-occupied or investment property, and whether you have an equity loan for personal use secured by the property.
  • Loan tenure: Computed at 35 years (30 years for a HDB flat) minus the number of years from when the first home loan was disbursed.

When there are joint borrowers, the loan tenure is also impacted by income-weighted average age, which is calculated by taking the average age of the borrowers, weighted by their respective gross incomes.

What’s next?

As a mortgage is usually a long-term commitment, it is wise to do your homework before embarking on a property purchase. Mortgage rules can be complex, which is why mortgage specialists are there to help you out. They will look beyond pricing and highlight aspects that might seem insignificant now, but can be important later on. If you have an existing mortgage, it is beneficial to review it from time to time, taking a holistic approach in terms of pricing, service and terms of your loan.

Before committing to a residential property loan, you are encouraged to read the Association of Banks in Singapore and MoneySENSE guide: What You Should Know About Housing Loans – Key Questions To Ask The Bank Before Taking a Housing Loan, which is available at www.moneysense.gov.sg.

By Lee Mei Ling – head of home loans, OCBC Bank

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