How Do Home Loans Work?
What exactly is a house loan?
An HDB loan, often known as a house loan, is money obtained from HDB or a bank to help you purchase a home. In the case of HDB flats, you may be able to get housing loans at a low interest rate, according to HDB regulations.
- A house loan uses your property as security for the loan.
- The amount awarded is determined on eligibility.
- When you pay the remaining purchase price to the seller after making the downpayment, the loan is disbursed.
- Interest is imposed beginning with the first disbursement.
Who is eligible for a home loan?
Prospective borrowers will be subject to their own qualifying standards set by HDB and the banks. These are some examples:
- ● Minimum and maximum buyer ages
- ● Loan amount
- ● Status of residency
Minimum monthly earnings
Compliance with the Monetary Authority of Singapore's property loan guidelines as well as HDB's/the bank's internal credit standards
To be qualified for a loan, you must demonstrate the capacity to service monthly payments if you are self-employed or do not have a regular income. Each lender will evaluate your eligibility based on its own set of criteria.
Types of home loans
Only HDB purchasers are eligible for a concessionary loan with an interest rate that is 0.1 percent higher than the CPF Ordinary Account interest rate. This interest rate is updated in tandem with the CPF interest rate.
There are two types of house loans available to banks:
- Loans with fixed rates
- Loans with floating or variable interest rates
- Fixed-rate mortgage
- The interest rate is set and will not fluctuate for the first several years (promotional rate).
- Even when market rates decline, the rate does not alter.
- Interest becomes variable after a fixed-rate period.
Loan Floating or variable rate home loan
Rates vary and are often linked to a reference rate, such as the CPF Ordinary Account, Singapore Interbank Offered Rate (SIBOR), Singapore Swap Offered Rate (SOR), or a rate decided by the bank (e.g. internal board rate).
If the reference rate rises, so will the interest due, and vice versa.
HDB Loan Eligibility Letter
You must apply for a HDB Loan Eligibility (HLE) letter to find out if you are eligible for a HDB loan and the maximum amount you may borrow.
HLE assists you in planning for your house purchase by providing information on how much you may borrow, the monthly repayments, the amount of cash required, and other terms and conditions.
Property loan fact sheet
Before you sign up for a house loan with a bank, you must be given a property loan fact sheet. It explains how potential interest rate rises would influence your monthly payments and offers information about the loan's essential characteristics, such as: Loan amount and repayment period
- Total amount repaid
- The lock-in period
- Rate of interest and payback schedule
- Illustration of a rate change
- Interest rate in effect
- Penalty charges
Request that your bank walk you through the information sheet so you understand what you're getting into when you take out the loan.
Refinancing is the process of transferring from your current home loan to a new lender with reduced interest rates. Repricing or conversion is the term used to describe refinancing at your present bank.
You should evaluate your house loan on a frequent basis to determine whether you may save money by refinancing, especially if your lock-in period is coming to an end. It should be noted that HDB unit buyers are not permitted to refinance their existing bank loan with a HDB loan.
Before you refinance
- Consider if you are better off before refinancing:
- Maintaining your current mortgage bundle
- Converting to a new house loan package with your current bank
- Taking out a refinanced home loan with a new bank
- To examine and compare your options, follow these steps:
1. Consult your present bank.
- Before exploring with other banks, inquire about repricing alternatives with your current bank. Check to see whether your loan still has a lock-in term. If this is the case, certain sanctions may apply.
- Inquire with your bank about the following:
- Will I be charged a cost to cancel my present home loan package, such as penalties during the lock-in period, clawbacks, additional legal expenses, or conversion fees?
- Is it possible for me to refinance the loan at a lower interest rate? What are the charges?
- Is the new home loan package subject to a lock-in period? If so, how long will it take and what charges will be levied?
- Can you explain how the refinanced bundle will benefit me?
2. Compare loan packages
It's always a good idea to compare your current bank's repriced loan with other refinancing options to determine whether you should switch. You should contrast:
- Check the interest payable on the amended payback schedules for the various packages.
- The advertised rates as well as the effective interest rate (EIR) for the various packages.
If you modify your loan package, your monthly payments and interest rates will most likely vary. Banks must supply you with a residential property information sheet outlining the essential components of the loan package. Take advantage of this chance to ask questions about early loan repayment penalties or bundled goods, such as mortgagee interest policy, and compare them to other loan packages to understand the differences.
3. Read the fine print
Before agreeing to a refinanced home loan package, read the terms and circumstances and fully comprehend what the new package provides.
When you refinance your home loan, be sure to check the CPF Housing Withdrawal Limit that applies to you.
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