Financing Property Purchases

Before  committing to any property purchase, it is important to do a personal evaluation of whether you have adequate fund to finance a property purchase till completion.  

Your source of fund would consist of

3.1  Cash

This primarily refers to the amount of liquid cash available in the bank saving accounts.  Cash from stock/shares, fixed deposit and insurance policy maturity and sales of existing asset can be used to pay for property purchase if the liquidated funds are made available on time as per the property purchase payment schedule.

For buyer who do not plan to take any bank and/or financial institution loan, cash would be needed to pay for the full purchase price plus the applicable taxes and fees.

For buyer who plan to take bank loan and/or use their CPF (see section 3.2 below) to finance their property purchase, take note of the regulatory measure on the minimum amount of cash needed and applicable taxes and fees that cannot be paid by CPF and/or bank loan. Even if buyer has sufficient CPF to cover the Buyer Stamp Duty and conveyancing fee (HDB flat only), cash is still neeed upfront and apply for reimbursement from CPF thereafter. 

The applicable taxes and fees that needs to be paid in cash include Cash Over Valuation, BuyeeAdditional Buyer Stamp Duty, Good and Service Tax, Resale Levy, Conveyancing and Agent fees. 

3.2 Central Provident Fund (CPF

For Singapore Citizen (SC) and Singapore Permanent Resident (SPR) with a CPF account, the saving  in the Ordinary A  ccount (OA)  can be used to fund the purchase of residential property only.  

The CPF OA can be used to pay for the downpayment (less the minimum cash payment) in full or in any part thereof.   CPF cannot be used for resale levy and GST payment.

First time buyer of HDB resale flats can also apply for the CPF Housing Grant.    The CPF Housing Grant (which is dependent on average monthly housing income) can be used for the initial payment or to reduce the mortgage loan.

The followings are restrictions on the use of CPF monies for the purchase of residential property.

a)     The withdrawal limits is currently capped at 120% of valuation of each property.

b)    From 1^st July 2013, there is restriction on the use of CPF monies for lease less than 60 years.  CPF monies cannot be used for flats with lease less than 30 years.

c)     I f you are 55 years old and above, you need to set aside half the prevailing Minimum Sum fund into  the retirement account.

d)    If you are using CPF for second property, you can only use the excess OA after setting aside half the prevailing Minimum Sum.  The total CPF allowable for second property is also capped at 100% of Valuation limit.

For more details,  please check  the  CPF Board website.

CPF cannot be used for commercial or industrial property purchase.

3.3 Mortgage Loan

A mortgage loan is a loan to buy a property and secured to the property that you purchase. In general, all types of properties are eligible for loans including new, resale and properties under construction

A loan is usually repayable in monthly installment and interest is charged from the date the loan is first disbursed.   The disbursement may be upon the signing of Sales and Purchase Agreement for a completed (new/resale) property and/or in stages for a property under construction.

If a mortgage loan is required, it is prudent that the buyer  approach the  financial institutions to check how much the buyer can borrow before even embarking on the property search journey. This would enable the buyer to right size their property purchase without overstretching their finances.  This is especially important for Geylang projects as financing is a big challenge for most prospective buyers as only limited banks and/or finanicial institutions provide housing loan for Geylang projects. 

          Regulatory Measures on Mortgage Loan 

Since 2009, the Government has introduced a series of measures to cool and ensure a stable and sustainable property market.   Below is a closer look at some to the regulatory measures that are applicable to mortgage loan from banks and/or financial institutions.  

(Important disclaimer: While every reasonable care has been taken to prepare the contents of this summary, the author cannot be held respons i ble for any inaccuracy. Please check with the appropriate parties for the latest update or interpretation of the measures before booking and/or contract execution) 

a)     Loan Tenure or Repayment Period  

The loan tenure is the duration of time that you take to completely repay the loan.  Loan terms usually range form 10 to 30 years.  The longer your loan term, the smaller the monthly repayment, but the higher the total amount of interest you will eventually pay. 

With effect from 6 October 2012, the maximum repayment period or loan tenure is capped at 30 years . 

Also note that your age may be a limiting factor – banks will typically cap the maximum term up to the age of 70.  So if you’re 45 years old, you may only be given a loan term of up to 25 years. 

b)    Loan Amount  

The actual amount that the bank will loan to a buyer to finance a property purchase is dependent on 2 regulatory guidelines; the Loan to Value (LTV) limit and the Total Debt Servicing Ratio (TDSR) framework. 

The current LTV limit is capped at 80% of the purchase price or internal valuation (whichever is lower). The actual allowable LTV is dependent on whether the buyer has an existing housing loan.

Besides the allowable LTV limit, the bank will also need to do an assessment of the buyer ability to repay the loan by looking at the Total Debt Servicing Ratio (TDSR).  Under the TDSR framework (w.e.f 29 June 2103), banks will need to take into consideration borrowers' other outstanding debt obligations (such as credit cards bills, car installment, personal loans,etc) when granting property loans.  The TDSR for any property loan extended should not exceed the threshold of 60%. 

There is also another ratio, the Mortgage Servicing Ration (MSR) than bank will need to compute for borrowers who are buying the public HDB flat.   The current MSR loan limit for HDB purchase is at 30%.

  In summary, property loan extended for private property (inlcuding commercial and industrial) should not exceed the allowable LTV limit and a the TDSR threshold of 60%. 

So, if a mortgage loan is required, it is prudent that the buyer approach a financial institution to do an IPA (In Principle Approval) on how much the buyer can borrow before even embarking on the property search journey. This would enable the buyer to right size their property purchase without overstretching their finances.  

c)     Interest Rate 

Though the current interest rate is very low, the interest rate used in the computation of TDSR is 3.5% for residential and 4% for commercial/industrial property. 

In general, most banks will offer either a fixed or a floating interest rate package for the mortgage loan. 

Fixed interest rate offers the borrower security and stability as the rate does not change over the agreed period of time.   But this comes at a price – fixed rate packages usually charge higher interest than floating rate packages. 

Floating or variable rate packages are typically linked to either the SIBOR rate or in-house lending rate.  These rates are mainly affected by US interest rates and Singapore banking system liquidity.  Currently, floating rate packages are much lower than but do not assume that they will always stay at the lows all the time.  The current SIBOR is around 0.5%, but this will change if US interest rates rise; in 2007 they were as high as 3.6%!      

d)    Features to consider when comparing mortgage loan

Another feature when comparing and choosing loan is the lock-in period.  Typically the shorter the lock-in period, the higher the interest rate 

The lock-in period you should choose depends on your expectation of when you will sell the property and also on your view of where interest rates are going.  Typically, if you repay the mortgage within the lock-in period, there is a penalty to pay and this can be substational. 

Closely tied with lock-in is another useful clause on whether the bank will allow partial redemption of loan without charges.  This is particularly useful if you find that there are some excess funds (from a windfall, or a sales of property) that you like to use to reduce the mortgage loan.