Do you want to own a home in Singapore but do not have the funds? You might think you have to save for years to make that dream possible.
However, there’s an easier way out. With a mortgage loan, you can easily buy a property. This is because mortgages allow you to own property and consistently pay for it over a long time. Some lenders even offer flexible payment terms to help you manage your finances.
In this article, we’ll discuss mortgages and how to calculate housing loan.
What Is A Mortgage?
A mortgage is a type of loan secured to purchase a property. It constitutes an agreement between a lender and borrower in which the lender is sanctioned to the property should the borrower default or delay in repaying the loan.
A mortgage is also a loan against property, that is, a secured loan in which the property is pledged as collateral. Hence, should you fail to repay, the lender can take full ownership of the property and sell it to recover the loan.
As you learn how to calculate housing loan, ensure that your financial situation is compatible with the lender’s repayment terms to avoid delaying payment and losing your property.
Features of A Mortgage In Singapore
Every loan in Singapore has its distinct features that define and set it apart. Some of the features of a mortgage include:
Loan Amount And Tenure
The loan amount is the amount of money you will receive when you apply for a loan. For example, if you borrow $800,000, most lenders will loan you this amount. However, for a property, banks will only grant a maximum of 75%, which will be $600,000. This is known as the loan-to-value (LTV) ratio.
The loan tenure is the amount of time you are given to repay the entire loan. For a mortgage, this can be a short term of five years or a long term of 35 years. For bank loans, the maximum tenure for private properties is 35 years, and 30 years for HDB flats.
Factors that affect the loan amount and tenure include:
Your Financial Commitment And Income
Your maximum house loan amount is typically determined by the Total Debt Servicing Ratio (TDSR), the Mortgage Servicing Ratio (MSR), the loan tenure, and a medium-term 1-4% interest rate. The MSR applies to HDB flats and executive condominiums (ECs) only.
We’ll discuss this in more detail later on.
The younger you are, the longer your loan tenure will be. However, your age cannot exceed 65 years at the end of the loan tenure.
If the loan tenure for HDB loans exceeds 25 years or 30 years for ECs, the maximum loan amount can be lowered to 55%.
Nevertheless, you can use a bank HDB loan calculator to estimate your loan amount and tenure. Such calculators are easy to use and adjust when comparing different loan terms.
An upfront cost is a one-time payment made before or during the settlement of your new home. An example of this is the downpayment, which is a portion of the home’s buying price.
However, since this downpayment is not covered by the mortgage loan you obtain, you will need to pay for it using cash or your CPF Ordinary Account (OA) savings.
This refers to expenses recurred continuously to retain the ownership of the property. Examples include utilities, maintenance costs, homeowner’s insurance, and property taxes, which are paid monthly to cover the previous month’s expenses.
In some cases, you might be able to pay the monthly installments out of your CPF OA savings. Use a CPF housing loan calculator to determine how much you can use for this.
The interest rate is an amount charged on top of the loan as a percentage of the principal loan amount (e.g. 2.5%). In Singapore, the law dictates that licensed money lenders charge an interest rate of only up to 4% a month for loans. This means legal money lenders cannot charge more than 4% interest on loans per month.
Banks charge lower interest rates per annum. There are two types of interest rates – fixed and floating. Fixed interest rates do not change for a set period, meaning you’ll pay a consistent amount throughout the loan tenure. Floating rates, on the other hand, can fluctuate, varying the amount you’ll pay.
Before you choose either, research and use a mortgage calculator to understand how they work, and the pros and cons of each. Alternatively, you can consult a loan advisor for more information.
What Is The Maximum Loan You Can Get?
Three factors will determine the maximum you can borrow:
Mortgage Servicing Ratio (MSR)
The MSR is the proportion of your gross monthly income used to service or pay for your housing loan. In Singapore, your MSR cannot exceed 30%. For example, if you earn $8,000, your MSR would be ($8,000 x 30%) / 100% = $2,400.
Total Debt Servicing Ratio (TDSR)
The TDSR is a proportion of your monthly income that will be used to service all your monthly debt repayments. It takes into account all your loans and obligations such as credit cards, car loans, etc. In Singapore, the TDSR limit is set at 55% of your monthly income.
Loan-To-Value (LTV) Ratio
The LTV ratio is the value in percentage of your loan amount against the value or market price of the property. It influences the approval of your application and the loan terms you’ll be offered.
In addition, lenders use the LTV ratio to determine the risk they’ll take when offering you a mortgage. The higher the LTV ratio, the greater the risk for a lender.
Note that the LTV ratio = Loan amount/ property price. Using a housing loan calculator, let’s say you want a loan amount of $150,000, and the property’s purchase price is $300,000. Your LTV would be ($150,000/$300,000) x 100% = 50%.
Banks accept a maximum LTV of 75%, while the maximum LTV for a HDB concessionary loan cap is 80%. However, the number of housing loans you have can lower your LTV ratio.
Calculating The Value Of Your Property
Property valuation helps you to get a good gauge of a property’s price by taking into consideration its benefits, costs, and qualities.
Property valuation enables you to make financial plans and anticipate future mortgage needs. There are two ways to calculate the value of your property:
Use An Online Valuation Calculator
This property valuation method involves an in-depth analysis based on different factors such as:
- Land size
- Number of rooms
- Age and condition of the property
- Vehicle accessibility lease
- Floor area
- Current market state
Do note that the values provided by online property valuation calculators are based on data from previous sales. As a result, they might not account for any efforts made to increase the property’s value after the last selling price was recorded, which could impact the potential market value.
Hire A Licensed Appraiser
A professional property valuer or appraiser will consider aspects of the property that are particular to it, such as the cost of repairs and upkeep for various home components. Then he or she will apply one of the following methods to derive the value:
- Comparative market analysis
- Income method
- Residual method
Similarly, an appraisal is just an estimate and not the property’s actual value.
How To Calculate Housing Loan
To calculate how much housing loan you can afford, we recommend you utilise an online mortgage calculator in Singapore. This allows you to gauge the principal loan amount, interest rates, and loan tenure.
While at it, note that the recommended mortgage should be 2.5 times your annual gross income. Hence, if you are earning about $50,000 per year, your mortgage amount will be around $125,000.
You can also tally up all the costs related to a mortgage in Singapore as discussed above, and compare them to your resources such as your savings, monthly income, and other assets.
This will enable you to assess your long-term ability to service the mortgage loan.
Although it is difficult to predict whether mortgage rates may decrease in the future due to the state of the economy and factors affecting supply and demand, we advise you to borrow an amount you can afford to pay back consistently.
You can also speak with a loan consultant at Credit 21 for additional guidance and assistance in getting a loan that will match your needs.
How To Calculate Your Mortgage Payment
To calculate your mortgage payment, use the loan-to-income ratio determined by the TDSR we discussed earlier.
Your loan-to-income ratio cannot exceed 55% of your monthly income. However, some lenders might offer a higher limit though this is not guaranteed.
Use a loan calculator in Singapore to determine how much you will be paying every month. To start, enter your:
- Loan amount
- Loan tenure
- Interest rate
With these terms, you will get:
- Total payment
- Total interest
- Monthly installment
The type of interest rates you choose will also determine your monthly payments. Therefore, if you choose the fixed rate, the amount you pay will be the same every month. But if you choose floating rates, the total payment, interest and monthly installments will vary.
In addition, with an extended loan tenure of 30 years, your monthly installments will be low, which can help you manage your finances and make timely payments. However, the total amount you pay overall will be higher.
Similarly, if you choose a short loan tenure of five years, your monthly installments will be higher, but the total amount you pay will be low because the interest will not accumulate.
Calculate Your Housing Loan With A Loan Calculator
Housing loans make home ownership easier for individuals and families.
Moreover, learning how to calculate housing loan with online tools and choosing your preferred tenure and interest rates also allow you to manage your finances better and avoid sinking into debt.