Buying a property is a big investment and one of the main concerns of potential homeowners is getting the best home loan package. Since different people have varying needs, what is considered best for you may not be suitable for another. With so many choices out in the market, the process of selecting the right loan package can be rather challenging.
In this issue, we offer some useful insights for you to have a hassle-free search for your home loan!
1. Prepare in advance
You’re required to pay at least 1% of the purchase price in exchange for an Option to Purchase. After which, you’re given up to 14 days to decide whether to proceed with the purchase and to pay off the balance of 9% (completed property) or 4% (property under construction) to exercise the Option.
At this point, do consult a Mortgage Specialist on your financing needs. As mortgage documentation takes about 10 to 12 weeks to complete, it’s best to apply for the loan early. Once the loan is approved, there is sufficient time for the documentation to be completed before the next payment is due. Do note that most banks charge a cancellation fee of up to 1.5% on the loan amount, should you decide to terminate the loan subsequently.
2. Decide how much you can afford
The banks determine the maximum loan amount by applying a debt servicing ratio of between 30% - $35% of your monthly income. Simply, your total monthly loan amount should not exceed this ratio when compared to your monthly income. Other loan commitments, such as your car loan, will be taken into consideration as part of your monthly commitments. The Mortgage Specialist will be able to give you an indication of the loan amount that you are eligible for.
3. Select your ideal loan tenure
Generally, the maximum loan tenure is 35 years but it depends on the age of the borrower. In the case of joint applicants, the maximum loan tenure will be based on the age of the youngest borrower such that the loan tenure plus age of the youngest borrower does not exceed 70 years on loan maturity.
4. Choose the package according to your needs
Most banks offer 3 main types of home loan packages: Fixed Rate, Variable Rate and Market-pegged (i.e. SOR/SIBOR-pegged) packages. It's important to understand your needs and intentions before you can decide which package is most ideal for you.
Fixed Rate - For those who want peace of mind.
- During the fixed rate period, there is no interest rate volatility but this is not recommended if you have the intention to do partial prepayment or full settlement during this period as there will be penalties involved.
Variable Rate - For those who intend to make prepayments.
- Full loan settlement without penalty is allowed for no lock-in packages. This allows you to make loan
prepayment without penalty.
Market-Pegged - For those with a good understanding of market pegged rates.
- If you don't mind interest rate movements, this option also allows you to make loan prepayment without penalty for no lock-in packages.
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| Did You Know? |
| SOR is Swap Offer Rate which is the rate of borrowing in U.S. Dollar (USD) and swapping it for Singapore Dollar (SGD) using foreign exchange. |
| SIBOR is the Singapore Interbank Offered Rate which is the rate that banks lend to each other. |
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5. Take note of common fees
Be aware of the following fees:
- Cancellation Fee: This is charged when the loan facility is cancelled by the customer after acceptance of the offer. This is to cover administrative costs involved in processing the loan.
- Redemption Fee: This is charged if a loan is fully repaid within a pre-determined period, generally in the initial years and may range from 1 to 5 years depending on the package.
- Prepayment Fee: A 1% to 1.5% fee is charged when any lump sum prepayment is made to the loan (usually in the initial years).
- Late Fees: This is charged if the monthly loan instalment is not paid when due. Also known as a 'Default Fee'.
6. Service your mortgage using CPF Funds
If you intend to use your CPF savings to fund your property purchase and to service the monthly loan instalments, it is advisable to check your available CPF balances first with the CPF Board. Based on the CPF policy, members have to set aside the prevailing minimum sum cash component in their Ordinary and Special Accounts before they can use further CPF savings up to the Available Housing Withdrawal Limit (AHWL) to repay the loan. With effect from 1 Jan 2008, the AHWL is 120% of the purchase price or valuation of the property at the point of purchase, whichever is lower. For more information, click here.
7. Have your documents ready
Most banks will require the submission of the following documents for the purpose of home loan application:
- Copy of applicants' identification documents (NRIC/Passport)
- Applicants' income documents
- Applicants' CPF statement of account and contribution statement
- Option to Purchase/Booking form for property
8. Additional pointers
A solicitor has to be engaged to act on your behalf for the purchase, the mortgage and the withdrawal of CPF Funds (if you intend to use CPF funds). You may appoint the same law firm to act on your behalf for all the 3 roles. This arrangement is more convenient and also helps to reduce legal costs.
A formal valuation report is also required by the bank and CPF Board, if CPF funds are used. Most banks will, on behalf of the loan applicant, obtain an indicative valuation of the property at the point of loan application. Upon loan approval and acceptance, a formal valuation report will be done.
9. Look out for extra perks
Some banks offer free fire insurance for the first year, valuation fee and legal fee subsidies. However, do take note that there are conditions attached to such perks. These payments will have to be fully refunded to the bank if your loan is redeemed within the clawback period, which varies for different banks.
10. Get Mortgage Insurance for protection
A mortgage insurance, also known as Mortgage Reducing Term Assurance (MRTA), covers the home loan balance in the event that the borrower dies or is totally and permanently disabled. Although not compulsory, it is recommended to protect your home loan liability with mortgage insurance, because life has its uncertainties. In the occurrence of such unfortunate events, the loan repayments will be covered by the insurance payout.
Click here to find out how OCBC Mortgage Blueprint can help you achieve your dream home now.
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