What you should know about home loans - Key Questions to Ask the Bank Before Taking a Home Loan

Click here to view the pdf version.

Table of Contents

Introduction

The Basics

What to Ask the banks

• Eligibility 
• Interest Rates 
• Reference Rates 
• Effective Interest Rates 
• Repayments 
• Subsidies and Other Features 
• Fees and Charges 
• Documentation & Terms and Conditions 
• Refinancing 
• Default

INTRODUCTION

For most people, buying a home represents the most expensive purchase of a lifetime and would need long term financing to achieve.   

This guide focuses on home loans meant for owner occupation.  A home loan or mortgage is a term loan, secured on the property that you buy. The lending bank will have first charge on the property, followed by the CPF Board if CPF savings have been used to service the loan or as downpayment or both.

THE BASICS

What to bear in mind

• As a general guide, your monthly home loan instalments and other long-term debts such as car loan or hire purchase commitments should not be more than 35% of your gross monthly income
• Allow for contingencies including interest rate increases over the term of the loan¹
• Find out your CPF Withdrawal Limit²  if your CPF savings are used in the purchase
• Note the bank charges overdue interest if instalment payments are late
• Note also that if you fail to pay your instalments, the bank can recall the loan and repossess your property for sale
• The bank may make you a bankrupt if the sales proceeds from your property are less than the outstanding loan and interest payable, and you are unable to repay the shortfall

Property eligible for Home Loans

• HDB flats
• Private properties already completed
• Private properties under construction

Loan tenor

The duration of the loan is known as the loan tenor or repayment period.

Categories of Home Loans

The two broad categories are:
• Fixed rate loans
• Floating or variable rate loans

What’s the difference?

Notification³    

a. Changes to Interest Rates

Banks must inform you in advance (usually 30 days) before they change the interest rate on your home loan. 

b. Changes to Loan Terms and Conditions

Banks must inform you in advance (usually 30 days) before they change or vary the terms and conditions of your loan agreement.

You too need to notify the bank and obtain its consent when you seek to vary the loan agreement, such as by repaying or refinancing your loan.

Ask the bank what notification is required for any change initiated by you.

Shop Around – Don’t Stop at Two

• Shop around and find the package that best fits your financial circumstances 
• Do not be enticed into making hasty decisions based on advertisements headline rates or gifts
• Compare features like:
  • interest rates
  • lock-in period and fees
  • cancellation fees
  • bank subsidies for fees for valuation, legal and conveyancing services and fire insurance
• If you are considering refinancing, do check the prevailing interest rate after the lock-in period and compare it with the rate you are currently paying
• When browsing on the Internet for home loans, note that some of the information may not be the most recent. Always talk to your bank on the latest product features

WHAT TO ASK THE BANK

Now that you know the basics, the following are some key questions you should ask the lending bank before deciding which loan to take. The questions are supplemented by easy-to-understand explanations, highlighting common features of a home loan.
 

ELIGIBILITY

1a. Am I eligible for a home loan?

Banks typically apply eligibility criteria on borrowers.  These eligibility criteria include:
• minimum income
• minimum and maximum age
• residency status

Banks may also set a minimum loan quantum. This means that you must obtain a home loan of at least this amount.

1b. Am I eligible if I am self-employed or do not have a regular income?

The answers depend on the criteria the bank applies.

INTEREST RATES

2a. Interest Rates Under a Fixed Rate Loan   

How long will the interest rates remain fixed?  Is the subsequent interest rate benchmarked against any reference rate?  If so, what is the reference rate?

For fixed rate loans, interest rates are fixed and guaranteed in the first few years. Subsequently the interest rates will be variable and typically benchmarked against a reference rate (See Question 3). 

The reference rate may be:
• determined by factors set by the bank or
• benchmarked against a publicly available financial indicator, like the Singapore Interbank Offer Rate (SIBOR)⁴, Singapore Swap Offer Rate (SOR)⁵ or interest rate paid by the CPF Board on CPF Ordinary Accounts

The fixed rate period can be considered a promotional period as the rates in this period are generally lower than the subsequent variable rate.

2b. Interest Rates Under a Floating or Variable Rate Loan

Is the interest rate benchmarked against any reference rate?  If so, what is the reference rate?  

Like fixed rate loans, the interest rates under floating rate loans are typically benchmarked against a reference rate.

The reference rate may be:
• determined by factors set by the bank or
• benchmarked against a publicly available financial indicator, like the Singapore Interbank Offer Rate, Singapore Swap Offer Rate or interest rate paid by the CPF Board on CPF Ordinary Accounts

Often, the variable rate for the first few years is lower than the subsequent variable rate. This lower variable rate can be considered a promotional rate, with a discount or lower premium on the reference rate in the first few years of the loan.

Examples:

Table 1

While the discounts and premiums typically cannot be changed, the bank may be able to change the reference rate at any time. See Question 3 for factors that affect the reference rate for your loan.

2c. When will the bank start charging interest on a home loan?

Banks will start charging interest only from the date the home loan is first disbursed. They will not charge interest from any other dates e.g. letter of offer date. Your bank will let you know when the loan is disbursed as well as the monthly instalment to make or the interest you have to pay from the following month.

REFERENCE RATES

3. What factors can affect the reference rate for my loan?  How often can the bank change the reference rate during the loan tenor?   Is the reference rate specific to this loan? How much notice must the bank give me before a change in interest rate can take effect?

Reference rates differ from bank to bank. Within one bank, reference rates may differ from one loan package to another.

The publicly available financial indicators adopted as the benchmark for the reference rate are usually not determined by any individual bank. For example, the Singapore Interbank Offer Rate (SIBOR) and Singapore Swap Offer Rate reflect market conditions, rather than the actions of a single bank.

A bank may also create its own reference rate for its loans, taking into consideration a slew of factors such as:

• prevailing market conditions such as the bank’s business and funding costs at the time the loan is taken
• specific loan details like:
  • interest rate structure (e.g. fixed or variable rate)
  • loan tenor
  • type of property
  • property development status (i.e. whether completed or under construction)
  • percentage of financing required

For loans whose reference rates are determined by the bank, the bank can usually change the reference rate at any time.

Under the Code of Consumer Banking Practice, banks are required to inform you in advance (usually 30 days) before any change in the reference rate can take effect. However, for loans where the dates for the fixing of the interest rate have been predetermined and mutually agreed between the bank and the customer, e.g. loans benchmarked against a market index like SIBOR, the notice period for any rate change does not apply. Banks should nevertheless explain the reason(s) for the change in rates.

EFFECTIVE INTEREST RATE

4. What is the Effective Interest Rate (EIR⁶ ) for the whole loan tenor?

The EIR reflects the cost of interest expressed on an annual basis that you have to bear throughout the loan tenor. The lower the EIR, the lower the interest cost over the loan tenor.

The EIR may be higher than the advertised rate for the loan for a particular period e.g. the first 3 years, as the advertised rate typically reflects the interest charged for a particular period only.

For instance, you take out a $500,000 30-year home loan with the following interest rate schedule (assuming the current reference rate is 5%):
• Year 1 interest rate:  Reference rate minus 3% p.a = 2% per annum (p.a)
• Year 2 interest rate: Reference rate minus 2% p.a= 3% p.a
• Year 3 interest rate: Reference rate minus 1% p.a= 4% p.a
• Year 4 onwards: Reference rate= 5% p.a 

Assuming interest is computed on a monthly-reducing basis and that there is no change in the reference rate, the EIR over the 30 years is 4.62 % p.a.  If there are no changes made to the loan or to the reference rate, you would be effectively paying an interest charge of 4.62% p.a. over 30 years.

The EIR serves as a common denominator allowing you to compare loan packages of different interest rates and tenors. When studying different loan packages, it is useful to compare both:
(a) interest rates in the initial years when promotional rates (i.e. usually discounts on reference rates) are charged by the bank or when the interest rate is fixed
(b) the EIR which reflects the interest cost throughout the loan tenor. You can ask the bank for the EIR of your loan

Points to note about the EIR:

• It is computed based on prevailing interest rates, loan disbursement(s), and monthly instalments over the entire tenor of the loan 
• It will be revised if there are changes to your loan, including changes in interest rates.  So ask the bank for an updated EIR for the remaining tenor of your loan when there are changes to your loan
• It cannot be ascertained for a property under construction where the timings of the loan draw downs cannot be determined

REPAYMENTS

5. Under the instalment plan for the home loan, is interest computed on a monthly-reducing, annual-reducing or other basis? How does interest computed for this loan compare with that computed on another basis?

Repayment of a home loan is usually made in monthly instalments. Each instalment consists of two parts: principal repayment and interest payment.

The instalment depends on:
• the loan principal
• loan tenor
• the interest rate
• how interest is computed

The two common methods of interest computations are:
• Monthly-reducing (or monthly-rest) basis whereby:

• Annual-reducing or annual-rest basis:

Note: The more often interest charges are computed, the lower the amount of interest paid over the loan tenor. It means that the total interest payable on a monthly-reducing loan is lower than the total interest payable on an annual-reducing loan.

6. What is the instalment payable each month or each year? How much goes into paying interest and how much into paying the principal? Can I get a loan repayment schedule for this loan?

Ask the bank for key information (as summarised in Table 2 below) on the home loan you are considering. It will help you better understand how much you have to pay each month as well as the interest payable in the initial years -- when you enjoy promotional rates -- and over the entire loan tenor.

Table 2

*Note: The above table assumes that promotional rates (discounts on the reference rates) are offered in the first 3 years, and that there are no changes to the reference rates in those 3 years. 

Refer to the loan repayment schedule (also known as an amortisation table) for more details.  Banks will provide such a schedule for the loans they offer in hard copy or soft copy on the bank’s website.

This repayment schedule will indicate:

(a) your monthly instalments throughout the loan tenor. This will help you assess whether you can afford to take the loan.  As a general guide, your monthly instalment on your home loan and other long term loans should not exceed 35% of your monthly gross income

(b)  how much of the monthly instalment goes towards paying the principal and how much towards paying interest, and the total amount of interest payable for the whole loan tenor. The monthly instalment for a loan with a longer tenor will be smaller than one with a shorter tenor. However, you pay more interest on a loan with a longer tenor or bigger principal

(c) when the loan would be paid off.  If you are using your CPF to pay your home loan, it is prudent to pay off your mortgage by the CPF withdrawal age of 55 due to reduced CPF contribution rates after 55

When considering different loan packages, always compare their repayment schedules.  Check the total amount of interest payable during the initial years where promotional rates or fixed rates are offered, and the total interest payable over the tenor of the loan. 

Repayment schedules
• are computed based on prevailing interest rates, assumed dates of loan disbursement(s), outstanding balances and loan tenor
• will be revised if there are changes to your loan, including changes in interest rates or loan tenor or both. Ask the lending bank for an updated repayment schedule whenever there are changes to your loan

You may also wish to discuss with your bank the options for reducing the amount of interest payable or paying off the loan earlier.  For instance, you can consider:
• shortening the loan tenor
• increasing your monthly payments
• reducing the loan quantum by paying off part or all of it early

Please refer to Questions 8 and 10 on what to ask on revising your monthly payments and making prepayments.

7.  Will I be provided statements of my home loan account?

Banks provide an annual statement of your home loan, detailing transactions like:
• interest charges
• monthly instalments paid
• prepayments made
• total interest paid during the year

Banks may also provide interim statements upon request, although some may charge for the service.

8. Can I change the monthly instalment payment amount during the tenor of the loan?  Would I need to pay any fees or charges? What are the terms and conditions?

Some home loans offer you the flexibility to change the monthly instalment payment amount during the loan tenor. However, do not be attracted by a loan package merely because of repayment flexibility. Ask your bank:
• if there are any fees or charges involved
• the amount of notice needed before a change can be effected
• the minimum payment amount acceptable

Although these facts are usually set out in the loan agreement, it is best to find out beforehand.

SUBSIDIES &OTHER FEATURES

9a. What are the other key features of this loan and are they subject to change?  

Some home loan packages are more complex than they appear at first glance.  Here are some examples:
• One portion of the loan carries a fixed interest rate while the other portion has a variable rate
• Loans with offsets: the interest earned on a deposit account with the bank goes towards offsetting the interest payable on the home loan
• Loans where the monthly loan payment is a percentage of the property value

Read the bank’s marketing brochure and terms and conditions carefully to understand how the special features apply. These features may be subject to change which will cancel or reduce the apparent attractiveness of the loan as packaged and marketed. 

Ask if the bank has the right to change these features and the options available if you do not want the proposed changes. 
 
9b. What value-adds does this loan provide?  Must I repay these value-adds if I pay off my loan earlier or refinance it?

Besides attractive rates, home loans may come with other value-adds like:
• legal fee subsidy
• free fire insurance
• free valuation

It is worth noting, however, that you may have to repay all or some of these value-adds if you repay the whole loan before the lock-in or prepayment period expires (see Question 10). Read the loan terms and conditions carefully to understand how this works for the loan you are considering.

9c. Will I better off if I use the services of the law firm or insurance company recommended by the bank, even if no subsidy is offered?

Generally, you may benefit from economies of scale and pay lower charges if you use the lawyer or insurer recommended by the lending bank. You may wish to compare fees or premiums charged by other law firms or insurance companies before making a decision.       

PREPAYMENT

10. How long is the lock-in period and what is the prepayment fee?
How much notice must I give the bank if I want to pay off part or the whole loan early?

You may want to make lump sum payments (or prepayments) during the tenor of the loan. You must inform the bank in advance before you make such payment.

Banks may impose penalties or fees when you:
• make a prepayment without giving advance notice
• settle the outstanding loan in full before the expiry of a certain period (commonly known as the “lock-in period” or “prepayment period”)
• make a prepayment during the lock-in  period which results in the outstanding principal falling below a stipulated minimum balance

Check the terms and conditions of the home loan or check with the bank about its prepayment rules:
• before taking a loan
• whenever you wish to make a prepayment if you already have a loan

FEES AND CHARGES

11. What are the fees and charges applicable to the loan?

Fees and charges are levied for:
• processing the loan application
• not taking the loan after accepting the loan offer
• late payment
• changing the loan tenor
• switching to a different loan package during the tenor of an existing loan
• prepaying a portion or the full loan during the lock-in period
• restructuring the loan

Ask the bank for a schedule of fees and charges applicable to the loan you are interested in. Ask for the fees payable during the lock-in period and the fees after the lock-in period so that you could explore refinancing possibilities after the lock-in period if the interest rate is in your favour. 

 DOCUMENTATION & TERMS AND CONDITIONS

12. What loan documentation will I be provided with?

Loan documents provided by the bank include:
• the letter of offer
• terms and conditions governing the home loan
• other documents such as schedule of fees and charges

Do’s and don’ts concerning loan documents:
• To avoid misunderstanding, do not rely solely on verbal communications given by bank staff. Obtain written documentation where possible   
• Always take note of the fine print relating to interest rates, fees, terms and conditions, as well as the value-adds (e.g. legal subsidy) of the home loan
• Review all documents before signing them
• Ask the bank staff or your lawyer to highlight critical clauses that you should take special note of
• Ask for an explanation if you are not sure how certain terms and conditions will apply. These could relate to:

• The right of the bank to
  • require the borrower to pay all or part of the outstanding home loan without prior notice given to consent received from the borrower
  • cancel the loan without prior notice given to or consent received from the borrower
  • debit any of the borrower’s savings or deposit accounts maintained with the bank to settle the outstanding amount due under the home loan
  • rely on a “jointly and severally liable” clause in the loan agreement for a home loan taken out by two or more borrowers.  Note that if one borrower dies, disappears or is declared bankrupt before the loan is paid off, the clause enables the bank to claim the outstanding amount from the other borrower(s)
  • take certain actions when the value of the property is less than the outstanding loan (this situation is called “negative value” or “negative equity”)

13. What if the written loan terms and conditions differ from what has been discussed or provided?

Raise the matter with the bank if you discover any discrepancies.

14. What should I do if I have concerns about changes proposed by the bank to the terms and conditions of my home loan?    

Make sure you understand why the changes are being made. Talk to a bank staff if you are unsure how the change will affect you, or if you are not happy with the change. Do so before the new term or condition takes effect. If the bank agrees to any variation to its proposed changes to the terms and conditions, such variation should be put in writing.

REFINANCING

15. What is refinancing? What are the procedures and costs involved if I decide to refinance the loan?

Refinancing is when you switch to a new home loan either with your existing bank or another lender. Note that switching to a new loan with lower interest rates at your existing bank is called re-pricing or conversion.

Review your home loan once every few years to see if you can get a better deal by refinancing, particularly so after your lock-in period. Ask your existing bank for re-pricing options, before checking with other banks.

Before refinancing, consider if you are better off:
• sticking to your current loan package
• converting to a different loan package with your existing bank or
• taking up a refinanced loan package with a different bank

Ask your current bank whether:
• you will incur a fee for terminating your existing loan
• you can convert the loan to one which is more attractively priced
• fees will be imposed on such conversion
• there will be a lock-in period for the new loan and if so what is the lock in period and charges involved.

Ask the bank whose refinancing package you are considering to show how you will be better off with the refinanced package

Compare:
• an updated repayment schedule for your current loan package with that of the refinancing packages you are considering and check the interest payable
• the advertised rates and EIR for your current loan package with those of the refinanced loan packages you are considering

Note that the instalment amounts, interest payments and EIR will change once there are changes to the loan.

• Before committing to a refinanced or converted loan package:
• Read the terms and conditions and understand what the new package offers
• Find out the CPF Housing Withdrawal Limit applicable to you when you refinance your loan: 
  • If you refinance a property bought before September 2002, note that you will be subject to the CPF Housing Withdrawal Limit prevailing as at the date of the letter of offer provided by the refinancing bank
  • If you refinance a property bought after September 2002, you will be subject to the CPF Housing Withdrawal Limit prevailing as at the date you bought the property

Check the CPF Board website regularly for updates on the Board’s rules on housing.

DEFAULT

16. What happens if I default on my monthly instalment payment for my home loan?

If you default on your monthly instalment, the bank can:
• declare “an event of default” and recall the loan
• charge you a higher rate of interest
• sue you for the loan outstanding or initiate foreclosure (or both)  to sell your property to recover the outstanding loan balance and unpaid interest.  The bank can also sue you for any remaining sums unpaid if the sales proceeds from the property  is insufficient to pay off the outstanding loan     
• bring bankruptcy proceedings against you

To avoid such situations, you should:
• Not commit yourself to a loan package that you cannot afford
• Contact your bank immediately for help when  you face an unforeseen financial situation (e.g. sudden job loss) and find it difficult to meet your monthly instalments
• Not wait until you default on your repayments

Now that you know more about the intricacies of taking a loan for your new home, do use this knowledge to make your journey to home-ownership a smooth one!

1. Refer to the MoneySENSE Worksheet on "Buying a Home and Taking a Home Loan" at www.moneysense.gov.sg. The worksheet helps you assess affordability before buying a home.

2. Refer to the CPF Board's website (www.cpf.gov.sg) to work out your CPF Withdrawal Limit. Once you reach the limit, you will have to pay the loan instalments fully in cash.

3. The Code of Consumer Banking Practice, issued by the Association of Banks in Singapore (ABS), requires banks to give notification before implementation of any changes to the terms and conditions, interest rates, fees and charges.

4. SIBOR is the rate at which banks borrow from one another.

5. SOR is SIBOR plus lending costs incurred by banks. SIBOR and SOR are published in the Business Times.

6. In financial terms, the EIR is the internal rate of return computed based on the loan disbursement(s) and monthly instalments over the entire tenor of the loan.