A home loan is usually the biggest financial transaction you’ll ever make. But loans are sometimes taken without too much tho ught. And since HDB stopped providing market rate loans to HDB flat buyers, it means an additional 20,000 novices could be introduced to the arcane world of private-sector loans this year. That’s a lot of new clients for the banks to gobble up. To ensure you don’t get chewed up by slick marketing, scan this beginner’s guide to home loans (useful for HDB or private properties).
What is an HDB market rate loan?
Regular concessionary HDB loans are subsidized and restricted to certain borrowers – for example, a first-time buyer of an HDB flat. Other buyers, such as those whose income exceed $8,000 per month, or have already benefited from a concessionary rate loan, will have to get a "market-rate loan". The market-rate is tied to one set by POSB. But since January 1, HDB (via POSB) will no longer offer market-rate loans and borrowers will have to get loans from privatesector lenders, including the three big local banks and six foreign full banks. In a nutshell: financial institutions will provide housing loans to HDB flat buyers, just as they do to private property buyers.
What are the benefits for HDB flat buyers?
Loans from banks should in theory be more attractive because they are subject to more competitive pressure, rather than being tied to POSB’s rate. This implies borrowers will be exposed to prevailing rates – low now but possibly much higher in future. Competition should also result in greater flexibility in loan packages and more customization. Indeed even borrowers eligible for concessionary rate loans may opt for an HDB loan from a bank, if it proves more aggressive. Even those already on a concessionary rate loan can refinance their HDB loan with a bank.
What are the catches?
In bad economic times (a low interest rate environment) bank loans might seem better, but as rates rise banks may be quicker to pass on the pain to borrowers. Rates for HDB properties may be higher than for private property loans too, for a number of reasons. These include the smaller sizes of the loans (and proportionately larger administrative cost), and the uncertainty around how a bank would repossess an HDB flat even though that is legally enforceable.
And if you have a personal loan or credit card with the bank to which you're now mortgaging your HDB flat, the flat may serve as collateral not just for your home loan but also for your other loans with the same bank. If you are using CPF savings to pay for part of your property, then the property must be built on freehold or leasehold land with a remaining lease of at least 60 years. Older leasehold properties may be much harder to sell in as little as 10-15 years time.
How much can you borrow?
New home buyers will find that the maximum loan that a financial institution will provide is 80% of the purchase price, or market valuation of the property, whichever is lower. This amount is after deducting CPF monies used to buy the house. 10% of the down payment can come from CPF savings for private property, and 20% for HDB (by Jan 1 2008, this will also be 10%).
Example 1
- new home buyers: using CPF to pay for stamp and legal fees Market valuation s$1,000,000
-less 20% cash downpayment (assuming quantum at 80% of valuation) s$200,000
-less CPF lump-sum withdrawn to pay for property s$200,000
-less CPF monies used for payment of stamp and legal fees s$35,000
-equals maximum loan quantum that can be obtained, s$565,000
Example 2
- new home buyers: using cash to pay for stamp and legal fees Market valuation s$1,000,000
-less 20% cash downpayment (assuming quantum at 80% of valuation) s$200,000
-less CPF lump-sum withdrawn to pay for property s$200,000
-equals maximum loan quantum that can be obtained, s$600,000
-cash used for payment of stamp and legal fees s$35,000
How much should you borrow?
Conventional lenders allow you to dedicate up to around one third of your gross monthly income on your debt. But that’s not to say you borrow to the hilt. Just because you can have access to 80% of a property’s value doesn’t mean you should. Think about the implications of loan repayments to your lifestyle before you borrow too much. Even if you use CPF to pay much of the installments, you don't want your cash flow curtailing other important spending Your loan size should not depend too much on where interest rates are at any given time. Although rates are at low of 2-3 percent now, calculate what your monthly repayments would be if rates went up to 5% in a few years time. Plan for a worse case, so you didn’t get into difficulties in future.
Refinancing
Refinancing refers to getting a housing loan from a bank or finance company to replace the one offered by the HDB at market interest rates. It makes sense when the rates of the new loan offset the costs of changing. With new bank loans starting at two per cent level, and HDB’s market-rate loans still at 3.75 per cent,