Ask yourself these 5 questions to see if you’re ready to buy your first flat (and get your first mortgage) in Singapore.
Buying your first flat in Singapore can be a nerve-wracking experience. For most of us, it will be the only time we end up taking a loan that lasts 25 years. It’s a big step, so you’ll want to make sure you take some precautions.
The more time you spend understanding loans, the fewer tears you’ll cry if something goes wrong. Ask yourself these five important questions to see if you’re ready for your first mortgage:
1. Have You Paid Off Your Debts?
When taking a home loan, the loan quantum (the amount you can borrow) will be restricted by your Total Debt Servicing Ratio (TDSR). This is the percentage of your income used to repay all your loans, inclusive of car loans, education loans, credit card loans*, etc.
The TDSR is capped at 60 per cent. For example, if you earn $5,000 per month, the maximum debt repayment you can take on is $3,000 per month. If your loan repayments would exceed this amount, you will have to borrow less. That can mean having to fork out more money for the down payment, or not getting the home you want.
For this reason, you need to repay as many major loans as possible before getting a home loan. In addition, you should avoid taking further big loans in the year or two leading up to a home loan application.
For example, do not take up a car loan until after you have secured the home loan. Besides freeing up your TDSR, this will improve your credit score.
*For loans that allow variable repayment, such as credit cards and lines of credit, the minimum sum repayable will be used to determine the TDSR. This is usually $50 or three per cent of the amount owed, whichever is higher.
2. Do You Have a Good Credit Score?
Both HDB and the bank will check your credit score when you apply for a home loan.
The credit score, along with your TDSR, is used to determine your Loan to Value (LTV) ratio. The LTV determines the percentage of the home price that you can borrow. This is up to a maximum of 80 per cent for banks, and 90 per cent for HDB.
If you have a bad credit score, such as a C or D (delinquent payments) or past defaults, you will often get less than the full LTV. This can significantly raise the down payment required.
For example, say the bank considers your credit score unsatisfactory, and will only loan you 70 per cent of the house value, rather than the full 80 per cent. On a condo with a value of $800,000, the bank loan is just $560,000. You would need almost a quarter of a million dollars ($240,000) in down payment due to your bad credit score.
If you currently have poor credit, you can mend it by taking small loans, and paying them back reliably.
For example, you could pay through a credit card for a year (this means repaying the full amount charged to the card, every billing cycle). You could also get small personal loans, and ensure that you make all repayments on time until the loan is paid off.
Note that, if your credit report shows you have been bankrupt before, you will usually have to wait five years from receiving your official letter of discharge to obtain a loan. Some foreign banks may require seven years.
Don’t know what your credit score is? You can find out by getting your credit report from the Credit Bureau of Singapore (CBS). This usually costs S$6.42, but SingSaver.com.sg readers get free access to their credit report for the whole month of June!
3. Did You Compare the Different Home Loans in Singapore?
There can be as many as 50 different home loan products available at any one time. After all, there almost 200 banks and financial institutions active in Singapore.
It is important to pick the home loan that has the lowest rate. In general there is no advantage in getting a more expensive home loan. You don’t get privileges or rewards for accepting a higher interest rate.
On any given month, only two or three of the banks will be offering the cheapest loans. To find out which banks these are, you should engage the services of a mortgage broker. A mortgage broker will gather the loan information for you, usually for free (they are paid referral fees by the bank).
Do not simply take a loan from the first bank you come across. Due to the large sums involved in home loans, even small differences of 0.3 to 0.4 per cent can mean hundreds of dollars more each month.
4. Are You Buying a Flat You Can Afford?
As a rule of thumb, you should only get home that costs up to five times your annual household income.
For example, if you and your wife both earn $48,000 per year, your annual household income is $96,000. This means you can comfortably afford a house that costs up to $480,000.
Do not take the biggest loan you can get, even if a bank is willing to loan you enough for a flat that costs $600,000 or more. The more expensive the house is, the greater your financial burden. After all, you will have to make bigger mortgage payments every month.
In any case, neither banks nor HDB will give you a loan if repayments would exceed 60 per cent of your monthly income. (See the first point about your TSDR.)
5. Do You Have an Emergency Fund?
At SingSaver,com.sg., we advise that everyone build up an emergency fund of six months of their income. However, if you intend to buy a house soon and haven’t got one, you may not have enough time to do so. In this case, speak to the bank or a mortgage broker to find out what the loan repayments are likely to be.
Note that the repayments may change every month, if you are on a one-month SIBOR rate (the mortgage broker can explain these interest rate periods to you in greater detail).
You should try to save enough money to pay the mortgage for at least three months. In case of emergencies such as retrenchment, you will have time to find a new source of income. In a worst case scenario, it buys you time to sell the house at a good price.