Singapore House Purchase: A Guide to Bank Loans

If you are planning to buy a house in Singapore, it is highly likely that you will need to apply for a mortgage loan from a bank. This article will provide you with the essential information related to this process.

Loan Eligibility

As long as you are eligible to buy a house in Singapore, you can apply for a housing loan from a bank, even if you are a foreigner. Whether you are an office worker or a self-employed person, you are eligible to apply. Even investors who don't live in Singapore can also apply for a loan. However, please note that you must have proof of work income to be able to secure a loan.

Loan Process

The first step to securing a loan is to apply to the bank for an IPA (In-Principle Approval) from the bank. The bank will comprehensively assess the purchaser's income, employment status, age, assets, credit history and other aspects, to determine the loan amount as well as provide various applicable loan schemes applicable to you. This means that the bank agrees in principle on what kind of loan services to provide to the homebuyer. However, the IPA is not a legally binding document. The IPA approval process may take 7 to 30 days, depending on whether the materials you submitted are timely, complete and accurate. Generally speaking, the validity period of the IPA is from 2 weeks to 1 month.

It is recommended to apply for a relatively higher IPA amount at this stage, because after approval, you can request to reduce the amount. On the contrary, once you have paid the deposit, it may not be possible to successfully increase the amount later.

Then, if you decide to take a loan from the bank, the bank will issue you a Letter of Offer (abbreviated as LO), which will list all important information, such as the loan amount, interest rate and loan lock-in period. The loan agreement becomes legally binding only when both the homebuyer and the bank sign it. After that, you can exercise the Option to Purchase (Exercise OTP) and complete the property purchase transaction.

The process of applying for a mortgage loan in Singapore is as follows:

1. Compare the loan schemes of multiple banks and select 1 or 2 banks as alternatives.
2. Apply for an IPA.
3. The bank issues the IPA.
4. Select the desired property and submit a loan application to the bank.
5. The bank conducts an appraisal of the property.
6. The bank approves the loan application.
7. The bank notifies the lawyer to prepare relevant contracts.
8. Sign the housing loan agreement.
9. The lawyer registers the loan agreement.
10. Pay other related fees to the bank.
11. The bank disburses the loan.
12. Start making monthly payments.

Regular Documents Required for Applying for a Mortgage Loan from the Bank:

 A copy of the identity document (NRIC).
 The latest salary slips (for the past 3 months).
 The latest personal income tax statements (NOA) (for the past 2 years).
 The latest statement of the Ordinary Account of the Central Provident Fund (CPF).
 The latest statement checking whether you own a HDB flat.

Loan Amount

The loan amount you can obtain is affected by multiple factors, mainly including:

Total Debt Servicing Ratio，TDSR

This indicator applies to the purchase of all types of residential properties.
The Total Debt Servicing Ratio stipulates that only 55% of the borrower's total monthly income can be used to repay debts. These debts to be repaid include all your loans, including (but not limited to) your mortgage loan, car loan, credit card debt, and other personal loans. This means that if you have these other loans mentioned above, the amount of your mortgage loan will be affected.
Monthly income includes both fixed income and non-fixed income, such as bonuses, allowances, commissions, rental income, etc. Self-employed individuals have non-fixed income. Due to its instability, generally only 70% of the actual income is counted as monthly income when applying for a loan.

Mortgage Servicing Ratio，MSR

This indicator only applies to the purchase of HDB flats and Executive Condominiums (EC).
The Mortgage Servicing Ratio (MSR) refers to the proportion of your total monthly income used to repay the mortgage loan. Currently, the upper limit of the MSR is 30%. For example, if your monthly income is $5,000 , you can use at most $1,500 to repay the mortgage loan.

The Total Debt Servicing Ratio (TDSR) and the Mortgage Servicing Ratio (MSR) aim to encourage homebuyers to choose affordable houses and prevent excessive leverage, thus avoiding the risk of loan defaults.

Loan To Value，LTV

LTV refers to the ratio of the loan amount to the property value (or the purchase price, whichever is lower), that is, the percentage of the loan that can be obtained. For the purchase of the first property, the maximum LTV is 75%. Of the remaining 25%, 5% for the deposit must be paid in cash, and the other 20% can be paid in a combination of cash and the deposits in your Central Provident Fund Ordinary Account (CPF-OA).

The calculation formula is: Property value = Down payment (5% in cash + 20% in cash and/or CPF OA) + Mortgage loan (up to 75% LTV).

Note that in some cases of purchasing second-hand houses, the actual purchase price may be higher than the property appraisal value. For example, if you plan to buy a second-hand house, the seller quotes 1 million SGD, and the bank's appraisal value is $980,000. Then the difference of $20,000 is called Cash Over Valuation (abbreviated as COV). When applying for a loan, the lower of the two values is taken as the basis. So the maximum loan amount you can get is $980,000 × 75% = $735,000. Then the remaining $265,000 of the down payment must be paid in cash or with the Central Provident Fund. If you use the Central Provident Fund, you can use at most $980,000 × 20% = $196,000, then at least $69,000 needs to be paid in cash.
Note: The situation of COV will not occur when purchasing new houses.

What to Do If the Loan Amount Is Insufficient?

Suppose you want to buy a house worth 1 million SGD , and the bank only gives you a loan amount of $500,000 after assessing your situation, which does not reach the maximum LTV of 75%. At this point, you can choose to:

1. Increase the proportion of the down payment and pay $500,000 as the down payment.
2. Reduce the house purchase budget and consider properties with a lower total price.
3. Increase the mortgage loan amount through fund verification. At this time, the difference between the current loan amount and the maximum loan amount is $250,000. The bank will calculate an amount based on this $250,000 difference and require you to deposit this amount in the bank (usually, this amount is higher than $250,000). Depending on the borrower's creditworthiness, the bank may propose that all the funds can be deposited in the bank for only 1 day, or part of the funds can be deposited for 1 day and another part can be deposited for n years. This is what people often refer to as "show fund", which can help you increase your loan amount in an indirectly way.
4. In short, you should formulate a reasonable house purchase budget and loan repayment plan according to your actual situation to avoid cash flow problems and resulting losses.

Mortgage Interest Rates

Currently, the fixed mortgage interest rates in Singapore range from 2.5% to 2.8%, which are relatively low worldwide. There are two models of mortgage interest rate models:

Fixed Rate
During the entire loan period, the loan interest rate remains unchanged. In case the market interest rate rises later, you can still maintain a lower interest rate and save on interest payments. However, if the market interest rate drops later, you may end up paying more interest than others. The advantage of a fixed rate is that it is relatively stable, and you don't need to constantly pay attention to changes in interest rates. It is suitable for homebuyers with stable incomes or those who prefer not to worry about rate fluctuations. Generally, the fixed rate will be slightly higher than the floating rate on the market in the same period.

Floating Rate

It changes according to the fluctuations in a certain benchmark interest rate (SORA rate). Floating rate = SORA + Spread (adjustment spread). The advantage of a floating rate is its flexibility. If the benchmark interest rate drops, the monthly repayment amount will also decrease accordingly. However, during the period when the interest rate rises, the monthly repayment amount under the floating rate will be much higher compared to the fixed rate.

Note: For new condominiums that have not yet been completed (Pre-sale properties), banks only provide floating rate schemes and do not provide fixed rate schemes. After the condominium is completed, there is usually an opportunity to change the scheme for free.

Monthly Repayment Method

Unlike in China, Singapore only has the "fixed principal and interest" monthly repayment model. This means that under the same interest rate, during the entire repayment period, the total monthly repayment amount (principal + interest) remains fixed. The proportion of the principal and interest repaid each month will change over time. Initially, a larger portion of the repayment is applied to interest, with less applied to the principal. As the loan balance decreases, the portion of the principal repaid gradually increases and the portion of the interest gradually decreases. However, the total monthly repayment amount remains unchanged. If you want to repay part of the loan in advance, you will be repaying the principal, and then the repayment for the next month will be recalculated.

Lock-in Period

The Lock-in Period refers to the validity period of the loan scheme. During the lock-in period, if you need to repay part or all of the mortgage loan in advance, or conduct refinancing through the signed bank/other banks or even sell the property, you may need to pay handling fees. If there is a possibility of early repayment, you can negotiate with the bank when applying for the mortgage loan. Some bank loan schemes may offer to waive this handling fee.
If you have signed a loan scheme with a lock-in period, after the lock-in period expires, the bank will automatically change it to a higher floating rate. Therefore, it is recommended to start looking for more favorable loan schemes in the market 3 to 4 months before the lock-in period expires.

Common Banks in Singapore

1. Local Banks in Singapore:
• UOB 大华银行
• OCBC 华侨银行
• DBS 星展银行
• Hong Leong Finance 新加坡丰隆金融公司

2. Overseas Banks：
• Standard Chartered 渣打银行
• Citibank 花旗银行
• HSBC 汇丰银行
• Maybank 马来亚银行
• CIMB 联昌国际银行
• RHB 马来西亚兴业银行