When it comes to home loans, there is a lot of confusion. It’s understandable, as it’s a complex loan and most people deal with it just once or twice in their life. However, we’ve noticed some persistent myths that have developed; and we’re going to debunk them here:
Myth 1: HDB loans are always cheaper than bank loans
This is not always true. In fact, for almost a decade now (since the Global Financial Crisis in 2008), private bank loans have been a lot cheaper than the HDB Concessionary Loan.
The HDB loan is pegged at 0.1 per cent above the prevailing CPF Ordinary Account rate. This is about 2.6 per cent per annum, at present. However, typical private bank loans are still around 1.8 per cent per annum, even with interest rates rising.
It’s true that bank loans may be more expensive than HDB loans again someday (the historical average is between three to four per cent); but it is not always true that HDB loans are cheaper.
Had you used the bank instead of HDB 10 years ago, you would have saved a lot of money on your flat.
Myth 2: You cannot use your CPF to service the mortgage for private housing
You can always tap your CPF Ordinary Account (CPF OA) to service your home loan. This myth stems from a common confusion regarding the use of CPF monies for the down payment.
When you take a private loan from a bank, you must pay an absolute minimum of five per cent of the property value in cash (for example, $30,000 in cash for a $600,000 resale flat).
For HDB loans, it is possible for the entire payment – including the entire down payment – to be financed from your CPF monies. This is because HDB loans can finance up to 90 per cent of your property, and the remaining 10 per cent can be drawn from your CPF.
When it comes to the monthly mortgage payments however, you can use your CPF for both private and HDB loans.
Myth 3: Your bad credit score from somewhere else (Europe, the US, China, etc.) is causing the banks to reject your loan application in Singapore
Singapore banks check your credit score via the Credit Bureau of Singapore (CBS). At present, there is no cross-border data exchange agreement. If you are a foreigner, your credit score back home is not the reason you are being turned down for a mortgage.
It is more likely due to your lack of a credit score in Singapore (which you can build up by taking a small loan and reliably paying it back), or some other factor. Speak to one of our expert mortgage brokers, who will be able to identify the cause.
Myth 4: If you never use credit or take loans, you will have fewer problems applying for a mortgage
If you never use credit or take loans, your credit grade will be listed as Cx. This means there is insufficient data to determine how reliable you are at repaying loans.
Depending on the credit officer at the bank, this can actually raise your risk profile. There is nothing to show that you’re untrustworthy, but there’s nothing to show you are trustworthy either.
Try to get a credit score of AA before applying for a mortgage.
One simple way to do this is by paying “through” a credit card (e.g. when you charge $500 to the card, you immediately pay back the $500 so there is no actual borrowing). This builds your credit score, and there is no interest charged as you always repay the full amount. You can cancel the credit card after a month or two; all that matters is you have a record showing you’re reliable.
Myth 5: You will always get 80 per cent financing for the first house
The maximum Loan to Value (LTV) ratio is indeed 80 per cent. This drops to 60 per cent and lower for subsequent property purchases, if you have outstanding loans. However, it is a mistake to assume you will get the full 80 per cent for the very first home.
Banks will vary your LTV based on a variety of factors, which can range from the age of the property to your overall credit score. It’s possible that a bank will only be willing to give you 70 – 75 per cent.
This is why it’s important to do two things: first, you need to talk to multiple banks, as some may give you a higher LTV. Second, you should never sign the Option to Purchase until the bank has given you in-principle approval (an agreement to lend you a given sum).
Do not sign the Option first, and then find out later a bank will not lend you a sufficient amount.
Myth 6: You can always just refinance the loan when the interest gets too high
There is no guarantee there will be cheaper loan packages available, when you finally decide to refinance.
You should have one eye on various loans’ ultimate interest rate (the fourth year and thereafter rate), as they may represent good deals that won’t come around again; even if the teaser rates of other loans are better. Our brokers at KeyQuest can explain this to you in greater detail; suffice it to say that you cannot always “just refinance” to escape a high interest loan. Be careful of the loan package you choose.
In addition, there is a cost to refinancing (about $3,000), which may negate any potential savings. You may also find it tough to refinance if your financial situation changes, and you are earning less (which is also precisely when you need to refinance).
Myth 7: Board rates are always bad
Board rates allow a bank to unilaterally determine the interest rate, without reference to a public index such as the Singapore Interbank Offered Rate (SIBOR) or Swap Offer Rate (SOR).
We would usually be the first to agree that board rates are risky; you never know when the bank will try to hike them. However, there are some new variants on board rates that are now worth consideration.
For example, some banks offer Fixed Deposit Home Rates (FHR), in which the mortgage rate is pegged to the bank’s fixed deposit. While the bank can still control interest rates, they are natural disincentives to doing so; raising the rate would mean they also need to pay out more interest for their fixed deposits. There is also more transparency, given that banks have to advertise their fixed deposit rates (no one will put their money in a bank with mystery interest rates!)
Still confused? Our mortgage experts can help you out, and it’s free.
Not only do we have industry experts who work with almost every major bank, our service to borrowers is free. If you need further advice on getting a loan, or even if you don’t have time to handle the paperwork yourself, give KeyQuest a shout on Facebook, or contact us.