Wednesday, August 5, 2015

10 Terms to Know Before Taking Out a Mortgage Loan

There is no doubt that modern Singapore is an incredible place to live in, one of the brightest and busiest centres of culture and commerce in the world.  It routinely ranks among the top 20 richest cities in the world. In 2015, however, Mercer’s survey also ranked it among the top ten most expensive cities. Practically speaking, this means if you’re considering buying a home in Singapore, there’s probably a mortgage loan you’ll need in the future.

To the layperson, trying to understand a home loan for the first time is like deciphering a foreign language. Here are the top ten terms and acronyms you’re likely to run across as you prepare to take out a loan and buy a home, and what they mean for you.

1. MAS: Monetary Authority of Singapore

If you’re a Singaporean, there’s a good chance you are already familiar with this abbreviation. The Monetary Authority of Singapore is the country’s central bank, and the centre of financial regulation. You’ll come across MAS often when reading about home loans, as they set all the rules of lending.

2. Loan-to-Value Ratio

Your loan-to-value ratio, or LTV, is one of two ratios that will help you determine how much you can afford to spend on a property. Your LTV is exactly what it says on the tin: the ratio of how much you borrow against the value of the property. In general, your LTV can’t be higher than 80 percent.

3. Mortgage Servicing Ratio

The MSR is the percentage of your total monthly income that will go to paying back your mortgage every month. In 2013, MAS capped the mortgage service ratio at 30 percent. Your LTV and MSR are the first things you’ll need to figure out before you take up a home loan. Fortunately, there are some great online tools to help you do just that. Tools such as LTV and MSR calculators will show you exactly how much you can afford to spend. Once you’ve figured out your price range, it’s time to move on to the next step: who are you borrowing from.

4. HDB Loans

The Housing Development Board manages public housing estates, and they also offer loans for first time home buyers. HDB loans have a “concessionary” interest rate, based on the current CPF rate plus 0.1%. To get a HDB loan, you must have an income below S$10,000 per month, and be a Singapore citizen. 

5. Bank Loans

The alternative to a HDB loan is to borrow from a private bank. Banks offer a wider range of options and flexibility, like floating interest loans or fixed rate loans (more on those later.) You can also refinance a HDB loan to a bank loan. But be very careful before you take this option! Once you’ve applied for a bank loan, you will no longer be eligible to go back to HDB.

6. In-Principal Approval

If you decide to take a bank loan, obtaining an IPA will be your first step. An IPA will tell you how much that bank is willing to let you borrow, and lay out your options for interest rates and repayment plans. After you pick a loan package, the bank will give you a Letter of Offer, and that will let you use your option to purchase. Of course, selecting a loan package will mean deciding between a varieties of different interest rates. 

7. Floating Rate Mortgages

A floating rate mortgage is one of the options a bank loan will offer you: your interest rate will vary with changing national or international market conditions. Floating rate mortgages come in two primary types: SIBOR and SOR.

8. SIBOR: Singapore Interbank Offered Rate

SIBOR is a reference rate that is calculated daily, based on the rate at which Singapore banks lend funds to each other. It is subject to fluctuations base on the economic conditions.

9. SOR: Singapore Swap Offer Rate

SOR is SIBOR’s international cousin. Where SIBOR uses the exchange rate within the country, SOR trades on an international platform: the predicted exchange rate between the US dollar and the Singapore dollar. SOR is much more flexible: when it’s at a low, it will be lower than a SIBOR rate…but when it peaks, it will be higher than SIBOR. After the global economic crisis in 2011, SOR has lost some popularity, but there are still banks that offer it.

10. Fixed Rate Mortgages

You can also obtain a locked in rate from a bank. Most fixed rate mortgages will lock your rate up to a period of five years only, before it defaults back to a floating rate. Because the rate is fixed, the bank is taking some risk that you’ll be paying less than the current national interest rate. This means that fixed rate mortgages are stable but come at a higher base price.


Don’t feel like you need to buy a new dictionary to apply for a home loan: once you get the basics down, you’ll start recognizing the same terms popping up all over the place! With a little research and tools like Property Guru, you’ll be well on your way to a new home in Singapore.

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  1. Good to know those terms.

    What might be helpful as well is to have a look back at the historic interest rates in Singapore. There were periods of 8 to 9% as well! And then to compute your monthly mortgage payment based on an average rate of, let's say, 5% to see whether you can still afford it. Regression to the mean applies to mortgage rates too.

    In the case of condos one might want to consider these questions:
    Is it worth to pay almost double of the HDB-price for security guards that are not really required in safe Singapore, facilities that I hardly use, smaller room sizes, and bragging rights of having a private condo address?

    1. Hi Tacomob,

      There are advantages of owning a private condo. If we get a freehold private property, then it makes sense when we compare it to a 99 year leasehold HDB flat. Also, private property can be mortgaged out for us to get a term loan which is a form of cashing out. This allows us to have extra money at very low interests rates when we need it. It is not possible to do that with a HDB flat.

      On interest rates, the average rates in Singapore were around 3-4%. I do jot think interest rates will go up to a very high level as compared to the past anymore. The reason why interest rates were high in the past was because Singapore had very high growth rates and high inflation as well. The growth rate will not be that high any more as we progress as a developed nation.