Housing loans are ubiquitous in the world of finance and real estate. Homes cost money – a lot of it – and the majority of us don’t have the money to lay down all at once. Thus, loans and mortgage systems are put in place so everyone can get the chance at their dream home, under the condition that they pay off the total cost of the home with a yearly interest rate in exchange for living in it on a down payment.
While that’s the basic gist of any home loan or mortgage in the world, there are subtle yet crucial differences in each country. Singapore, for one, has its own set of rules and regulations surrounding home loans and its unique situation with subsidized housing.
How Do Housing Loans Work?
A home loan is offered through a credit union or bank, for the purpose of buying or building a home. You can find homes to buy through a housing loan in Singapore, online through various directories like PropertyGuru Singapore.
Loans depend on a number of factors, including your own financial situation and credit score, and before getting loan some major considerations to take into account are the given interest rate (the percentage cost added to the loan yearly or monthly on-top of the cost of each installment) and maturity period (length of the mortgage). Until a loan is entirely paid off, the bank or credit union owning the property holds its title – you get full rights as a homeowner over the home once the mortgage maturity period ends and all payments have been made.
Until then, it’s important to know what kind of loan to apply for. Here in Singapore, loans are either floating interest rate housing loans or fixed interest housing loans – and the differences are straightforward.
Floating interest rate loans are risky, yet could carry financial rewards for borrowers. If the market for loans is favorable (i.e. when the supply of vacant homes and flats exceeds the demand for them), a fluctuating or floating interest rate means borrowers end up paying less than on a fixed interest rate – but at the same time, when the market changes (demand for housing increases), the interest rates will hike, possibly past the level of a comparable fixed interest rate. A floating interest rate is controlled by the Singapore Interbank Offered Rate, according to iMoney.
A fixed interest rate home loan is predictable, with a set monthly payment schedule unaffected by the fluctuations of the market, or a given bank’s board rates. The bank imposes a single interest rate, and it stays steady no matter what.
Both have their advantages and disadvantages, depending on your confidence in the market and your financial situation.
Applying for a Housing Loan in Singapore
First things first, it’s important to understand what kind of risk is involved with offering a home loan – and how banks cover for that risk. A housing loan implies giving someone temporary rights over a home, in exchange for a promise of monthly payments – and eventually, full rights to the property. To ensure that you can actually get your loan paid, banks and credit unions will not give you a housing loan until you have passed an appropriate eligibility check.
There are a few factors that go into such an eligibility check, all of which are meant to evaluate your financial history and ability in order to decide whether offering you a loan is a favorable investment for the bank, or a possible liability they don’t want to have to afford.
Right off the bat, an eligibility check begins with a look into your credit history, credit bureau score, loan-to-value ratio and financial commitment to income ratio. That means that, in addition to looking into how committed you have been to meeting all your expenses and credit costs, your monthly expenses versus income will be evaluated, as well as the risk of the loan based on how much you can afford to pay, versus the total value of the property.
If more than 60 percent of your monthly income goes into expenses that may affect your chances of getting a loan. Generally speaking, monthly loan payments should be within or just around 40 percent of your total household income.
Furthermore, if you have a negative credit score, or a history of incomplete payments and outstanding debt, then your chances at getting a loan are further reduced. Loans are also harder to secure for certain age groups and lines of work, depending mostly on the stability of your job and life.
If, however, you successfully apply for a home loan, you’re well on your way to getting started on your new life in your very own home. It all begins with the discussion and terms of the loan, alongside a Letter of Offer that you need to sign following the approval of your loan.
What if a Loan Doesn’t Work Out?
While the standard practice when you fail to pay your loan is the threat of foreclosure, there are options you have to help you out with your loan. For one, you have the option of refinancing. Refinancing can be a tricky process – it involves legal fees, extensive documentation, and several penalties – but there are plenty of resources available online and through banks and credit unions to help struggling homeowners refinance their loan and come up with a different way to cover their expenses.
If refinancing isn’t an option, there are resources available online to help you short sale your home to avoid foreclosure, and walk away with the option to start anew. As Bankrate points out, while a short sale is a strong negative on your credit score, it isn’t as bad as foreclosure.
No matter how you get started on getting your home, the best first step is always to contact your bank and talk about getting pre-approved for a loan, so you have an accurate idea of what you can reliably afford over the next few years.