Million-dollar Public Housing in Singapore: A Look at Recent Developments

By SUSAN TEO

Last year and the start of this saw the public and semi-public housing landscape in Singapore experiencing a furor with the exorbitant prices that some HDB and HUDC flats are fetching on the open market.

Most recently in January, a second million-dollar HDB flat was born when an executive maisonette in Bishan was sold for a hefty S$1.01 million.

This broke the previous record of an executive maisonette at Block 149 Mei Ling Street in Queenstown which changed hands for S$1 million in September 2012. A high-rise unit in a 16-story block, its unobstructed view and proximity to the MRT have been cited as reasons for its record-breaking price. At that time, it also sets the record for the highest per square feet (psf) price at S$619. The three-bedroom flat, that comes with a study, was built in 1995, and has an area of 150 square metres. With a cash premium of S$195,000, while not the highest seen, it is still well above the median COV – normally below $100,000 (HDB InfoWeb) according to figures released by HDB.

Trailing behind, just a week before the Queenstown deal was closed, is a Bishan maisonette which changed hands for S$980,000 with a cash premium of S$200,000 despite its simple furnishings. The main selling points of this flat are its unique roof terrace and roomy interior of 1,800 square feet. It is also near to amenities and transportation networks.

Apart from the above two sales, last year also saw other pricey transactions. In May in Toa Payoh, an executive flat changed hands for S$910,000.

Meanwhile, HUDC (Housing and Urban Development Company) also witnessed a blip in prices.
HUDC (Housing and Urban Development Company) are semi-public housing with the possibility of being privatised from 1995. So far, 12 out of the 18 HUDC estates across the country, have been successfully privatised. HUDC was first built in the 1970s and 1980s to meet the lifestyle aspiration of the middle class. All are on 99-year lease. There are larger that the typical HDB flats. The average size of a HUDC is 1,650 square feet, whereas a five-room HDB flat averages1,200 square feet. However HDB stopped churning out these spacious flats in 1997.

In spite of the older facilities in HUDC, two HUDC maisonettes along Shunfu Road set records when they were sold for over S$1.2 million each. One unit was sold in July 2012 for a whopping S$1.28 million or approximately S$761 per square feet. While the other, in the same area, earned the seller of the 1,668 square feet flat the sum of S$1.22 million in 2011. Buyers of HUDC are often attracted by the spaciousness and en-bloc potential of the flats. Thus far, five of the privatised HUDC estates have been sold en-bloc.

Last year, the sky-high prices of these flats stirred up a minor frenzy, that prompted National Development Minister Khaw Boon Wan to urge the public to look at the“larger picture” and consider such prices as outliers. Property analysts agree that more million-dollar deals could be sealed for flats with exceptional features in prime locations. A case in point is The Pinnacle@Duxton – an award-winning HDB residential complex, that boosts a sky garden and superior interiors, among other unique features and facilities. All, including Mr Khaw, foresee seven-figure flats when the five-year Minimum Occupation Period (MOP) is met in a few years' time for this residential complex.

Another category of flats that will likely breach the $1 million mark is executive maisonette, fueled by HDB announcement on October 2012 that it will not be building any more of such flats. Already before this announcement, according to the Straits Times, in 2012 half of the eight units that crossed the S$900,000 selling mark were executive maisonettes.

Only two months into 2013, but 16 HDB flats are already sold for S$900,000 and above, with just over half being 5-room flats and the rest executive flats. 3 of these flats are only 11 years old and under. The newest is a 5-year-old 5-room flat in Jalan Membina. Its attraction lies in its proximity to Tiong Bahru MRT station and the city.

HUDC once again lead in crossing the million-dollar mark. Of the 4 HUDC sold in the two months, 3 went for over S$1 million, with the highest priced at S$1.25 million. All the 3 HUDC estates, where these units are located in are undergoing privatisation.

Table 1 illustrates the resale prices of the 20 HDB and HUDC units that are transacted at S$900,000 or more this year.

Table 1

HDB Town	Flat Type	Lease Commencement	Resale Price	Resale Approval Date
Bendemeer Rd	Executive	1994	$918,000.00	Jan-13
Bishan St 13	Executive	1987	$940,000.00	Jan-13
Bishan St 13	Executive	1987	$1,010,000.00	Jan-13
Bishan St 22	Executive	1992	$901,888.00	Feb-13
Bishan St 22	Executive	1992	$938,000.00	Jan-13
Bishan St 23	Executive	1992	$902,000.00	Jan-13
Geylang East Ave 1	Executive	1987	$900,000.00	Jan-13
Holland Dr	5 Room	1975	$920,000.00	Jan-13
Jln Membina	5 Room	2008	$925,000.00	Feb-13
Jln Membina	5 Room	2003	$930,000.00	Jan-13
Marine Cres	5 Room	1975	$935,000.00	Jan-13
Marine Dr	5 Room	1977	$910,000.00	Jan-13
Marine Ter	5 Room	1975	$905,000.00	Jan-13
Queen'S Cl	5 Room	1996	$900,000.00	Jan-13
Strathmore Ave	5 Room	2006	$901,888.00	Feb-13
Tg Pagar Plaza	5 Room	1977	$965,000.00	Jan-13
Hougang Ave 2	HUDC	1990	$1,065,000.00	Jan-13
Hougang Ave 2	HUDC	1988	$960,000.00	Jan-13
Hougang Ave 7	HUDC	1986	$1,040,000.00	Jan-13
Shunfu Rd	HUDC	1986	$1,250,000.00	Jan-13

Source: HDB Resale Flat Prices



Read more articles at  
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/

SIBOR vs. SOR Based Home Loans in Singapore

SIBOR vs. SOR Based Home Loans in Singapore from Property Buyer Singapore

Read the full article here.  

Join us on Facebook:  
www.facebook.com/iCompareLoans  
www.facebook.com/SGpropertyBuyer  
www.facebook.com/sghomeloan

A Quick Guide to Approval-in-Principle (AIP) for Home Mortgages

By SUSAN TEO

Approval-in-principle (AIP) for home loans, or mortgage prequalification, are conditional approval. AIP can be sought for loans of private residential properties or HDB flats. Such loans are known as pre-approved loans. The time between submitting an application for an AIP and knowing the outcome can be as fast as 15 to 60 minutes. The validity period of the AIP varies between 14 to 30 days. During this period, financial documents have to be submitted to obtain a formal offer. After which, a Letter of Offer will be issued if the loan is approved. If the required documents are not submitted within this period, you can still re-apply for the AIP.

Having an AIP lets you know the loan quantum you are eligible for and the monthly repayment amount.

An AIP is non-binding for both the applicant and the financier; therefore you are allowed to change financiers even after obtaining an approval-in-principle loan from the financier. You may even change loan package with the same financier that you have obtained the AIP from.

If you are confused about AIP, you can have a FREE discussion with a Singapore home loan consultant.

Why you should have an AIP?

 

Narrow down the property search

Having an AIP lets you zero in on the property you know you can afford to buy. Thus you will not be wasting time viewing properties that you later find to be out of your budget when you apply for that loan. This also explains why some property agents only work with buyers who already obtained an AIP.

Fast commitment

Being certain that you can afford that property allows you to commit immediately when you have found your ideal property. There is no waste in time between obtaining the loan and closing the transaction. Indeed during that interval, some other buyers may beat you in buying the property.

Forfeit of booking fee

To prevent other buyers from buying, you may choose to sign the option to purchase (OTP)
and lay down the booking fee, before you have obtained the loan.

But this may not be the best course of action as you may not be able to obtain an ideal loan with a favourable rate, or even if you do it may be with a lower loan quantum. In the latter case, the deal may fall through if you do not have sufficient cash or CPF fund to top up the shortfall.

Should the deal fall through, you will have to forfeit part or all of the booking fee (The booking fee and forfeit amount will depend on whether it is a private house or HDB flat and if it new or resale).

In another scenario, you may be able to obtain the maximum loan-to-value ratio (LTV), but the valuation of the property has fallen during the interval in which you had signed the option and obtained the loan.

For example, the purchase price you agreed on is $1.5m, but when you have obtained the loan the valuation of the property has dropped to $1.2m. Assuming that you are eligible for a 80% LTV, you thought you could obtain financing up to $1.2m, but because of the lower valuation you can only secure $960,000. If you do not have the means to make up for the $240,000 difference, you cannot seal the transaction. However, such situations are extremely rare and only happen during financial crises.

Things to be cautious about

As an AIP is provisional, the bank still can reject the application if there are any changes to your financial status. So avoid taking other loans or changing jobs before the Letter of Offer is issued.

Just because an AIP is provisional does not mean you should randomly select a bank from which to obtain an AIP, thinking you can secure the same loan quantum from other banks later. That particular bank may be offering uncompetitive rates and loan features. And you may later discover that you are not eligible for the same quantum from other banks.



Read more articles at  
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/

Freehold Residential Property: The Advantages of Acquiring One

by SUSAN TEO

Homes in Singapore come with different lease periods:

30-year lease (HDB studio apartments) 60-year* lease (private housings) 99-year lease (executive condominiums, private housings, all HDB flats except for studio apartments) 103-year lease (private housings) (Theses houses sit on freehold land owned by private developers.) 999-year lease (private housings) Freehold (private housings)

*A land at Jalan Jurong Kechil is the first 60-year-lease plot to be sold (on 15 November 2012) for residential development; thus 60-year-lease homes will be available soon.

Most housings in Singapore either fall into freehold or 99-year lease, with the latter making up the bulk.

A 999-year lease is almost equivalent to freehold.

While 30-year-lease HDB studio apartments come in short supply and are only meant for elderly residents.

Private developments with a 103-year lease period (the lease period is determined by the developer) on freehold land are few and far between. At the expiry of the lease, the non-governmental land owner has the right to re-acquire the land (i.e. reversionary right), sell the freehold tenure or extend the lease for a price.

Residential properties with 60-year lease are not available yet, but will be in a few years' time when development on the first 60-year leasehold residential land plot at Jalan Jurong Kechil is completed.

Homes in Singapore are predominantly 99-year leasehold because the government sells most lands on 99-year tenure due to land scarcity in this country. At the end of the lease period, the state can acquire the land without any compensation to the home owners. Currently, the government does not offer freehold land parcels for sales anymore, except for the sale of remnant State land to the adjoining landowner whose existing private land is already held under a freehold title.

However, topping up of the lease of leasehold private housings is allowed.

Lessees may apply for a renewal of the lease with the SLA (Singapore Land Authority). The granting of extension is on a case-by-case basis and will be considered if the development is in line with Government's planning intentions, supported by relevant agencies, and results in land use intensification, mitigation of property decay and preservation of community (SLA, “Waiver of Building Premium”). If the extension is approved, a land premium, decided by the Chief Valuer, will be charged. The new lease will not exceed the original, and it will be the shorter of the original or the lease in line with URA's planning intention.

In addition, near the end of the lease period the State may require the land to be returned in its original conditions. If so, demolition of buildings, land fillings, etc. will have to be borne by the current lessees.

For HDB flats, legally the flat will be returned to HDB at the end of the lease. HDB does not have to make any monetary compensation, or offer a replacement flat to the owners. The owners may also be required to remove any fixtures fitting.

Advantages of buying a freehold or 999-year leasehold home

 

1. Loan Approval

Only a handful of banks will grant housing loans for properties with less than 60 years of remaining lease, and it is on a case-by-case basis. The loan if granted may have a shorter tenure or lower quantum. Thus, if you purchase a freehold property it will save you from the disappointment of loan rejections, or unfavourable loan terms, because of the lease of the property.

Further, you may have a easier time selling off the property since the potential buyer will have a higher probability of obtaining the necessary funding.

2. Use of CPF funds

For freehold residential properties, you do not have to fret about not being able to dip into your CPF saving, or to do so at a lower withdrawal limit, for your purchase because of the property's expiring lease.

This is because you are not allowed to use your CPF funds for the purchase of private houses with under 30 years of lease left.

For houses with remaining lease between 30 and 60 years, the withdrawal amount is tied to the buyer's age and the remaining lease.

Withdrawal Limit
= (The remaining lease of flat or property when the youngest owner is 55 years old / The lease of the flat or property at the point of purchase) x Valuation Limit*

Valuation Limit is the lower of the purchase price or the value of the flat/property at the time of purchase.

(Source: CPF Ask Us, “What are these additional conditions to use CPF for flats/properties with remaining lease of at least 30 years but below 60 years?” )

These CPF withdrawal rules and the attendant limits will affect HDB flats from 1 July 2013.

3. En bloc sales

Homeowners of freehold properties have higher chances of profiteering from collective sales.

Developers may prefer to acquire freehold over 99-year leasehold properties because they do not have to incur a hefty land premium to top up the lease (of which the approval is not even guaranteed), which eats into their profit margins.

Even if developers do acquire 99-year lease lands, they may offer a relatively lower price as they factor in the land premium they have to pay.

4. Long-term stability in value

Leasehold housings nearing the end of their tenure will always fall steeply in value. But you will never have to face this problem with a freehold.

However this is not saying a freehold property will not depreciate in value over time. This can also occur due to the decay of the building. When this happens, the redevelopment value of the land may exceed the value of the building; thus resulting in a collective sale.

In summary

 

Generally, freehold residential properties cost more than leasehold ones. But less clear-cut is which category enjoys a higher rate of price appreciation. If you are considering residential real estate as an investment vehicle to reap capital gain, you should be looking at the rate of price appreciation.

Another warning. If you are attracted to freehold because you are harbouring hopes of bequeathing the property to your descendants till perpetuity, you might want to perish that thought. En bloc sales could go through as long as there is a majority consent. Further, under the Land Acquisition Act, the State has the authority to acquire the freehold property “for public and certain other specified purposes”, with due compensation. This Act also applies to leasehold property.

When all said and done, leasehold homes will still remain attractive to buyers due to their affordable prices and proximity to amenities.


Read more articles at  
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/

Why Singapore Property Prices Go Crazy

By PROPERTY BUYER

“The measures that were announced by the Singapore government on February 19 do not address the root cause of the problem yet. The root cause of the problem is a short-term supply crunch at the lower end of the market, but it definitely helps mitigate the risk of bubbles being formed in the future.” (Channel NewsAsia, 2 Mar 2010, Asian property prices expected to continue to rise despite govt measures, Karamjit Singh)

We read Mr. Karamjit Singh’s comments and we did a bit more research. So here is what we found.

 

Singapore’s population according to the Singapore Department of Statistics are: -

Table 1: Singapore's Population 2000-2012

	Total Population ('000)	Resident Population (Citizen + PR) ('000)	Annual Increase in Resident Population + Local Citizens ('000)	Annual Increase in Total Population ('000)
2000	4,027.9	3,273.4
2001	4,138.0	3,325.9	52.5	110.1
2002	4,176.0	3,382.9	57.0	38.0
2003	4,114.8	3,366.9	-16.0	-61.2
2004	4,166.7	3,413.3	46.4	51.9
2005	4,265.8	3,467.8	54.5	99.1
2006	4,401.4	3,525.9	58.1	135.6
2007	4,588.6	3,583.1	57.2	187.2
2008	4,839.4	3,642.7	59.6	250.8
2009	4,987.6	3,733.9	91.2	148.2
2010	5,076.7	3,771.7	37.8	89.1
2011	5,183.7	3,789.3	17.6	107.0
2012	5,312.4	3,818.2	28.9	128.7

Figure 1: Detailed Statistical Table (Singstat)

There is a nice table at
http://tankinlian.blogspot.com/2010/01/hdb-flats-and-population-growth.html
which shows the relative growth rates of HDB.

We are not against importing talent, but we think Singapore had been over-doing it, without studying the strain the additional populace will make on the country's basic infrastructure like transportation and housing. The miscalculation by the Government resulted in an inadequate supply of HDB flats to meet demand. This, we believe, is one of the causes of Singapore's escalating property prices.

Table 2 shows the number of new HDB flats (Source: HDB Press Release) rolled out each year from 2006 -2012 and the estimated housing demand in those years.

Based on the latest Census of Population 2010, the average household size stands at 3.5 people (Source: Department of Statistics), we divide the Annual Increase in Total Population by 3.5 to obtain the Estimated Housing Demand, the latent demand (rental + purchase)

Since 80% of the Singapore's population lives in HDB flats, we estimate that the Estimated HDB Housing Demand from foreigners to follow the same trend as 80% of total demand.

Table 2: Singapore's Estimated Housing Demand and HDB Housing Supply

	Estimated Housing Demand (Annual Increase in Total Population / 3.5 per household)	Estimated HDB Housing Demand at 80% of Total Demand	HDB Supply of New Flats (estimated)
2006	38,743	30,994	2,733
2007	53,486	42,789	5,063
2008	71,657	57,326	7,793
2009	42,343	33,874	13,500
2010	25,457	20,366	17,713
2011	30,571	24,457	25,200
2012	36,771	29,417	34,237
Total		293,600	106,239

(Source: www.PropertyBuyer.com.sg, Singstat and HDB Press Release)

This is the total latent demand as all foreigners arriving into Singapore will need to have a place to stay. In other words, these form largely the total demand (Rental + Purchase).

ACTUAL DEMAND IMPACT ON HDB

Now let’s take a look at the number of immigrants eligible for HDB purchase. Only Singapore citizens can buy HDB flats directly from HDB. Permanent Residents (PRs) are allowed to buy HDB flats only from the resale market.

Figure 2: Singstat, popinbrief2012a.pdf

Annual increase in population based on Table 1 (in 000s), is 54.5 in 2005, 58.1 in 2006 and 57.2 in 2007, 59.6 in 2008, 91.2 in 2009 and 37.8 in 2010, 17.6 in 2011, 28.9 in 2012.

Using Table 1, 3,818,200 (2012) – 3,467,800 (2005), the total population increase is 350,400.

As can be seen, a large part of these increases are due to NEW Permanent Residents and new Singaporeans (naturalised citizens) (Figure 2) with a small part contributed from local born Singaporeans.

Assumption of HDB demand caused by population increase

The increase in population is largely due to New Permanent Residents and New Citizens (Figure 2), with a small part contributed by increase in local born Singaporeans.

Assumption 1: 80% of the 350,400 population increase buys HDB.

Let’s assume that 80% of these new population increase buys HDB, that is a total of 280,320 people.

Assumption 2: 3.5 people to a household

Let’s assume that there will be 3.5 people to a household. 280,320 / 3.5 = 80,091 units of HDB demand arising from Permanent Residents and new Singaporeans.

• 80,091 HDB units of NEW Demand of HDBs from 2005 to 2012!!!

From 2006 to 2012, total numbers of HDB built and those that is announced and not yet completed are 106,239. But, since Permanent Residents cannot buy directly from HDB they will be competing for these flats after the minimum occupancy period (MOP) of 5 years when these flats can be sold on the open market.

LOCAL HDB Demand

There is also the annual household formation of 19,000 to 22,000 per year. Assume that 80% of these households would want to buy HDBs. So let’s say 80% of 20,000 would buy HDB, that would equate to 16,000 a year. 2005 to 2012, there would be a 128,000 of demand of HDB units.

• 128,000 HDB units of Local Demand of HDBs from 2006 to 2012!!!

Therefore, the total demand is estimated to be 208,091 units of HDB.

And HDB has only built or announced to build 106,239 units. There is an estimated shortage of over 100,000 units.

MASS MARKET HDB BEING PROPPED UP

Many of these new supplies were “Built-to-order” flats which can take 3 to 4 years to complete adding to acute shortages of HDB flats, further adding to the demand.

Demand from household formation (marriages) comes in at a range of 19,761 to 22,840.

These newly married couples surely need somewhere to stay.

Why didn’t HDB anticipate the demand?

Marriage rates is something which is very easy to estimate and very consistent over the years. Why didn’t HDB anticipate the demand?

WHAT IS THE LIKELY EFFECT OF MASSIVE IMMIGRATION?

Rental rates are being pushed up.

HDB property prices are being pushed up.

Faced with a lack of choices, Singaporeans will be forced to choose HDB flats in previously less desirable locations such as Punggol or Sengkang which has excess units. Not only that, some Singaporeans may choose not to wait and instead buy private housing directly if they can afford to.

For HDB flat owners whose property valuations have risen, they may consider selling their flats. After the sale, they will find buying another HDB flat too expensive; hence they may opt for private housing instead.
There is currently no shortage of total private properties in pipeline, which stands at 83,975 (Source: URA Release of 3rd Quarter 2012 Real Estate Statistics). This is easily 7 to 8 years of supply based on the average consumption trend.

The end effect is that a greater proportion of people will end up living in condominiums and private apartments. This will gradually deplete supplies and bring smiles to property developers in Singapore.

The Singapore government on the other hand will be happy that prices of land will rise and reach the land’s minimum reserve price to trigger a bidding process. More land sales equal more revenues for the government. And more developers bidding for land means higher prices. These higher prices are then translated into higher priced condominiums. Singaporeans will have to work even harder and hopefully earn more to pay for such private apartments or condominiums of which the major price component is the land price.

PERFECTING THE ART OF MICRO MANAGEMENT

Although it is a market driven economy, various policy levers which the government has access to means that it is not a 100% market driven economy. Though many countries are also similar.

Singapore has perfected the art of micro-management.

At $10,000 household income, HDB income ceiling, you cannot buy HDB flats.

At $12,000 you reach the Executive Condominium ceiling, you are not eligible to buy Executive condominium anymore.

At a household income of $12,000 onwards, the Singapore government strongly encourage you to move upwards in consumption.

Consumptions helps increase tax revenues (annual property tax, stamp duty, transaction fees for property agents which translate into taxes, sale of furniture, construction, work for lawyers, etc.), and helps the economy in creating jobs.

WHAT THIS MEANS FOR THE SINGAPORE PROPERTY BUYERS AND THEIR HOUSING LOANS?

If you are a Singapore Property Buyer, you have to be mindful that there is a gradual shift in Singapore Government policy in play. The government is the largest land-owner, it can regulate supply to influence prices. Being an honest and efficient Singapore government bent on maximising land productivity, hence the Singapore government is now releasing a lot of HDB land with these elevated prices to maximize revenues. If you already own land, good for you, if you do not own any property, you could be price out.

These subtle or not so subtle policy directions will either enrich or impoverish you. And when you consider your Singapore home loans, you ought also to take care to choose the right structure to capitalize on these unwritten government policies or mis-calculations.

We do not support or reject any government policies, we only highlight such policies to the attention of our readers so that they can find ways to benefit from these policies or outcomes of government’s miscalculations.  

Read more articles at  
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/

Tips for Interest Saving on Your Home Loan

by SUSAN TEO

This article highlights some ways to lower the interest payable on your loan.

Loan quantum or loan tenure

The most straightforward way to save on interest payment is to opt for a loan with a lower loan quantum or a shorter loan tenure. The downside is that there will be greater financial outlay (either CPF or cash).

Because with a lower loan quantum, you will have to make greater upfront payment. Whereas with a shorter loan tenure you will have to incur higher monthly installment payment.

The logic is simple. For a lower principal, the interest chargeable falls because it is a percentage of the former, and a higher monthly installment payment will reduce the principal faster.

Partial prepayment

You can make prepayment above the monthly agreed amount. This will effectively lower the principal, and hence interest payable. But many loans come with a lock-in period (aka. reimbursement period), typically the first 2 to 5 years of the loan tenure, during which partial or full repayment could involve a penalty of usually at most 1.5% of the re-payed amount. However, some loans do not have a lock-in period or its penalty only applies to full repayment.

(Note: For the aforementioned points, it will involve greater cash outlay; hence if there are other investments you can make with the monies you should weigh carefully if the potential gains can exceed the interest savings from paying off your mortgage faster or opting for a lower loan amount.)

Loan type

HDB or bank loan

Keep abreast of interest rate conditions and the economic policies of Singapore's major trading partners. These will affect the interest rates of loans.

As a rule of thumb:

During a low interest rate environment, it might be best to select a bank loan rather than a HDB loan if it happens that you are purchasing public housing. A bank loan will normally offer lower interest rate compared to a HDB loan in a low interest rate climate. But besides the interest payment, there are other deciding factors in taking a loan. For a more detailed comparison between the two, read these:“Explaining the Advantages of HDB Loans versus Bank Loans” and “A Quick Look at the Drawbacks of HDB Loans”.

Bank loans

For private properties, you can only finance them with bank loans.

With bank loans, you can choose from a selection of loan types. The most common being the fixed rate loan and floating (variable) rate loan.

In general, the rates on a floating (variable) rate loan is lower than for a fixed-rate loan because bankers need to hedge against the risks of keeping rates unchanged. However, during a high interest rate environment, it is possible than the upswings in rates for a floating (variable) rate loan result in greater interest payable compared to a fixed-rate loan. To decide between the two types of loans, you may want to read “Fixed-Rate Versus Floating Rate Home Loan Packages in Singapore: Which is Right for You?”.

Specifically, for a floating (variable) rate loan, to lower interest rate, you can consider a shorter tenure SIBOR or SOR. As shorter tenure usually has lower rates than the longer tenure ones.

However, shorter tenure comes with faster changes to the rates. For example, for a 1-month SIBOR, banks revise it at 1-month or 3-month interval. Whereas for a 12-month tenure, it is only revised every 12 months.

So when interest rates start to climb, you can end up with higher rate for the 1-month SIBOR. Below illustrates this

Initially:
1-month SIBOR = 0.31%
12-month SIBOR = 0.57%

3 months later:
1-month SIBOR = 0.80%
12-month SIBOR = 0.57%

But, at the end of the day, which will cost you more in interest payment will also depend on the spread. Because the interest rate always has a margin added to the SIBOR or SOR. The interest rate payable then is actually X-tenure SIBOR + spread, or X-tenure SOR + spread.

Another way to reduce interest payment is to select an interest offset loan. This is suitable for people with a large amount of idle cash in the bank. A portion of this deposited sum will earn a special interest rate that exceeds what is normally offered for bank deposits. The earned interest can then be used to offset the interest payable on the housing loan.

Loan features

Some floating (variable) rate loans have special features like an interest rate cap. This will translate into cost saving in case of an interest spike.

Refinancing or repricing

If you currently already have a housing loan, you can always terminate the existing loan and apply for a new one. The aforementioned points can serve as guidelines in your new loan selection.

An ideal time to switch loan package is after the lock-in period, as you will not have to incur a penalty. Your current financier may offer a free one-time conversion (i.e. repricing) to a package you are eligible for. Or they may charge a conversion fee.

Conversely, you can refinance, which means changing into a mortgage with a different financier.

For a detailed discussion of what to look out for in refinancing, check out our other article: “A Guide to Housing Refinancing in Singapore”. This article also illustrates the cost saving you can enjoy with refinancing, even during the penalty period.



Read more articles at  
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/

A Quick Look at the Drawbacks of HDB Loans

by SUSAN TEO

In the last article, I discussed about the pros of using a HDB loan. Here, we look at the opposite instead.

1. No saving left in your CPF (Central Provident Fund) Ordinary Account 

Before you are allowed to take a HDB loan, it is mandatory that all the balance (after setting aside an amount for the miscellaneous fees of the flat purchase) in your CPF Ordinary Account up to the valuation limit (the lower of the purchase price or valuation at the time of purchase) if applicable, be utilised first. After that, HDB will decide on the loan quantum based on the outstanding amount to be paid for the flat.

As the savings in the CPF Ordinary Account generate an interest, which has remained at 2.5% p.a. since July 1999, you lose this interest earning when you use the savings to pay for the flat.

However, you save on the interest payable for the HDB loan which is 0.1% above the interest rate for the Ordinary Account. In other words, the loan rate is 2.5% + 0.1% = 2.6% p.a..

Had you not utilised the savings in the CPF Ordinary Account, you would have to use the loan. The below illustrates the loss:

• CPF Ordinary Account Saving = S$50,000

• Interest earned at 2.5% p.a.= S$1,250

• Interest payable on loan at 2.6% p.a.= S$1,300

• Loss = S$1,300 – S$1,250 = S$50

Nevertheless, it is still possible than you would have been better off if the saving had remained in the Ordinary Account. Because the first S$60,000 in all the 3 CPF accounts (Ordinary, Special and Medisave) earns an additional 1% interest, with up to S$20,000 from the Ordinary account. So if you need to rely on the balances in your Ordinary account to make up the S$60,000, you forfeit this additional 1% of interest. The below is a simple illustration using the maximum amount of S$20,000 that can earns the additiona1 interest in the Ordinary account.

Loss from using your CPF balances instead of the HDB loan:

• Interest Rate Loss

= 3.5% (interest in CPF Ordinary Account) - 2.6% (interest on HDB loan) = 0.9% p.a.

• Annual Loss

= 0.9% x S$20,000 = S$180

Further, when the flat is sold, all CPF saving used and interest that would have been accrued if the sum had remained in the account, will be deducted from the sales proceeds, and refunded to the Ordinary Account. This will reduce the cash proceeds which you may need for other purposes. Anyhow, if you had financed the flat with a loan (bank or HDB), you would still need to repay the outstanding loan amount from the sales proceeds.

Another drawback of depleting your CPF Ordinary Account savings is that in the event of a job loss there might not be adequate balance to service the monthly home loan repayment; hence you may be required to service it with cash.

A way to circumvent having to use the CPF Ordinary Account balances to pay for the flat is to invest it before you make the flat purchase. You can do so for the savings in excess of S$20,000 under the CPF Investment Scheme - Ordinary Account. Or instead you can transfer the monies in your Ordinary Account to the Special Account which interest rate has remained at 4% p.a from 2000 till now. This transfer is irreversible and there is a limit to it - the balance in the account (inclusive of the amount withdrawn under the CPF Investment Scheme for the Special Account) after the transfer cannot exceed the prevailing Minimum Sum. Once the monies are in the Special Account, you cannot utilise it for your housing purchases anymore.

2. Possibly relatively higher interest and opportunity cost 

During a high interest-rate environment, a financing institution will, in all likelihood, offers a loan with a lower interest rate as compared to a HDB loan.

So the opportunity cost (best foregone alternative) for not using a private loan becomes higher. In addition, you also lose the 1% of additional interest on the savings (capped at S$20,000) in your CPF Ordinary account.

Whether you decide on a HDB loan or a bank loan, do bear in mind that you are not allowed to refinance to a HDB loan once you have taken a bank loan.  

Read more articles at  
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/

Explaining the Advantages of HDB Loans versus Bank Loans

by SUSAN TEO

Before 1 January 2003, people buying a HDB (Housing Development Board) flat have to finance it either with a HDB Concessionary Rate Loan or a HDB market rate loan. But since then the HDB market rate loan was replaced by home mortgage from financing institutions, which are gazetted by the Monetary Authority of Singapore.

HDB Concessionary Rate Loan 

Compared to a home loan from a financing institution, a HDB loan has more stringent eligibility requirements. The below covers most of them.   

Eligibility Criteria:

• For HDB flats only (resale or direct purchase from HDB)

• At least one buyer must be a Singapore citizen

• Must have a gross monthly income not exceeding $10,000 (or $15,000 for extended families)

• For DBSS flat the income ceiling is $8,000 (or $10,000 for extended families)

• For applicants under the Single Singapore Citizen (SSC) scheme, the income ceiling is $5,000

• Must not own any private residence (in Singapore or abroad), including HUDC and executive condominium

• Must not have sold a private residential property within 30 months and taken a HDB loan before

• Must not have previously obtained a HDB loan within 30 months

• Must not have taken more than two previous HDB loans

• Must not own more any market / hawker stalls or commercial / industrial property (Except if you operate the business yourself, have no other source of income, and only own one market / hawker stall or commercial / industrial property)

From July 2013, HDB loan will not be granted for flats with less than 20 years of lease. In addition, for flats with lease between 20 and 59 years, loan approval and tenure will be subjected to certain conditions.

Given the many restrictions of a HDB loan, why then do Singaporeans still want to take one? We delve further into the pros of this loan in the following sections.

1. Higher CPF (Central Provident Fund) withdrawal limit 

For financing by bank loans, the CPF Ordinary Account withdrawal cap is up to 100% of the valuation limit (VL), which is the lower of the purchase price or valuation at the time of purchase. If the loan is still outstanding when this limit is breached, the housing withdrawal limit can be increased to 120% VL provided that half (entire) of the prevailing Minimum Sum is set aside for borrowers below 55 (55 and above). This housing withdrawal limit varies with the purchase date of the flat, for purchases from 2008 onwards it is 120%.

With a HDB concessionary loan, however, you can enjoy a higher withdrawal limit.

For direct purchase from HDB, there is no limit to the saving in the Ordinary Account you can use.

For resale HDB flats, there is no limit to the saving in the Ordinary Account you can use, after you have set aside half of the prevailing Minimum Sum.

But from July 2013 onwards, for flats with leases between 30 and 59 years the use of CPF fund is allowed only if the remaining lease covers the buyer till at least 80. For such flats, the withdrawal limit will be computed based on the below formula:

Withdrawal Limit
 = (The remaining lease of flat or property when the youngest owner is 55 years old / The lease of the flat or property at the point of purchase) x VL

For example, at the point of purchase the buyer is 38 years old and the lease is 40 years. When the buyer turns 55, the remaining lease will be 23 years. Hence

Withdrawal Limit = 23/ 40 x VL

Table 1 further illustrates what is VL.

Table 1: VL

	Flat A	Flat B
Purchase Price (S$)	400,000	370,000
Valuation (S$)	350,000	420,000
VL (S$)	350,000	370,000

For flats with under 30 years of lease, use of CPF fund is prohibited. In other words, buyers will to cough up cash for the down-payment, monthly repayment of the loan, stamp duties and other miscellaneous fees.

2. No cash component required for the down-payment 

A key advantage of a HDB loan is that you do not have to stump up any portion of the down-payment in cash. You are allowed to use the balance in your CPF (Central Provident Fund) Ordinary Account to pay for it completely.

Whereas with a bank loan, you will have to pay at least 5% of the Valuation Limit (VL) in cash. If the loan tenure exceeds 30 years or extends past the age of 65, the minimum amount jumps to 10%.

3. Higher loan quantum 

For the first HDB Concessionary Rate Loan you are taking, the loan quantum is as high as 90% VL. In contrast, for bank loans, the quantum is capped at 80% LTV (loan-to-value ratio). It dips to 60% if the loan tenure exceeds 30 years or extends past age 65. Table 2 compares the down-payment components and loan ceilings for HDB and bank loans.

Table 2: Payment Structure for a HDB Flat

	Down-payment
	Cash Component	CPF Component	Maximum Loan Quantum
HDB Loan	≥ 0% of VL	First 10% or more of VL*	≤ 90% of VL**
Private Loan without*** Outstanding Mortgage AND• Loan tenure does not exceed 30 years; and • Sum of loan tenure and age of borrower at the time of applying for the loan does not extend beyond retirement age of 65 years.	≥ 5% of VL	Next 15% or more of VL*	≤ 80% LTV
Private Loan without Outstanding Mortgage AND• Loan tenure exceeds 30 years; or • Sum of loan tenure and age of borrower at the time of applying for the loan extends beyond retirement age of 65 years.	≥ 10% of VL	Next 30% or more of VL*	≤ 60% LTV

Source: HDB (http://www.hdb.gov.sg/fi10/fi10321p.nsf/w/HLHDBWhat?OpenDocument) Monetary Authority of Singapore (http://www.mas.gov.sg/~/media/resource/news_room/press_releases2013/Annex%20II.pdf) MoneySENSE (http://www.moneysense.gov.sg/en/Life-Events/Buying-a-Home.aspx)

*Do note that there is a limit to the CPF amount you can use for mortgage financing, as discussed earlier in the article.
** This loan quantum only applies to the first HDB Concessionary Rate Loan. The loan quantum for the second HDB loan will be reduced by the full CPF proceeds and part of the cash proceeds made from the sales of the previous flat.
*** Since buyers are not allowed to own more than 1 HDB flat concurrently and must dispose of their private residential properties within 6 months after buying a HDB flat, technically there shan't be a case with an outstanding mortgage.

New regulations, that have kicked in from 12 January 2013, dictate that the mortgage servicing ratio (MSR) for private loans must not exceed 30% of the gross monthly income of the borrower and 35% for HDB loans. So do note that to be eligible for the maximum loan limits stated in Table 2, you also have to meet the MSR cap.

Effectively, this can translate into a lower loan quantum for a bank loan compared to a HDB loan. For example, for a 30-year loan with a 80% quantum for a S$800,000 HDB flat, at an interest rate of 1.5% p.a., the monthly repayment amount will be S$1,932.67. In order to be eligible for a

• HDB loan: Gross monthly income ≥ S$5,521.92

• Private loan: Gross monthly income ≥ S$6,442.24

Thus, if your income is below S$6,442.24, you will not be eligible for a private loan of 80% LTV. If you extend the loan tenure, current rules mandate that you can only take up to 60% LTV.

Therefore, a HDB loan will allow a higher loan quantum.

4. HDB is more lenient 

As a Government agency which main goals are to provide affordable quality housing and encourage home-ownership, HDB tends to be more tolerant of delinquent borrowers.

But for a loan from a financing institution, you are always required to pay the monthly stipulated amount even if you have suffered a pay cut.

Further, HDB usually grants deferment of monthly installment payment if you have fallen into financial hardship. The banks, on the other hand, will likely be hot on your heels if you defer payment even for a day!

5. No penalty for partial or full repayment of loan, interest rebate given instead  

Of note, is that HDB imposes zero penalty for partial or full repayment of its loan.

Most mortgages of financial institutions, however, come with a lock-in period (aka commitment period) typically of 3-5 years. During this period, any repayment above the prior agreed amount will result in a penalty - usually at most 1.5% of the repayment amount. Financial institutions profit from the interest incurred on the loan, any partial or full repayment of the loan means a loss on interest earnings. Hence, the penalty helps to compensate for this loss.

In fact, HDB even reward you for making capital repayment. Interest rebates will be given on any amount of capital repayment made by flat owner from the next following day after payment is received. The rebate is calculated based on the below formula:

Interest Rebate = (Amount Repaid x Interest Rate) / 12 x 1/ No of Days in the Month x (No of Days in the Month – Day in which Amount is Repaid)

To illustrate

• HDB Interest Rate = 2.6% 
• Capital Repayment = $1,000 on 20th Mar 2013 
• No of Days in March = 31 

Interest Rebate = (1000 x 2.6% ) /12 x 1/ 31 x (31 – 20) = $0.77

6. Stability in interest rate 

Since revision to the interest rate of a HDB loan is made quarterly in tandem with changes to the CPF rate, which has been the same for over 10 years. The interest rate has, likewise, remained stagnant. A HDB loan, thus, offers relatively more stability than even a fixed-rate mortgage which rate is only fixed for 3- 5 years. This is not saying that there have been no fluctuations in HDB interest rates. For instance, in the 1990s rates demonstrated more volatility (Source: CPF, “Historical HDB Concessionary Interest Rate”).  

Read more articles at  
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/

What Are Home Loan Consultancy Sites All About?

by SUSAN TEO

This article introduces the benefits of using home loan consultancy sites. If you are planning to take a mortgage at some point in your life, you can benefit from reading this.

How online home loan consultancy work in Singapore? 

1. Mortgage consultants or brokers 

Basically, home loan consultancy or mortgage consultancy websites act as middlemen connecting borrowers to the financing institutions.

These sites have professional mortgage consultants who are aware of all the different home loans offered by every Singapore's bank. They will first assess the your financial risk profile and advise on the type of loan you should take. The consultant will then refer you to the financier providing the best loan.

This advisory service is completely free to you as the financing institutions will pay the mortgage consultants a commission upon successful disbursement of loan.

The financing institutions are willing to incur this cost as it saves them on front-end staffing.

2. Online home loan packages comparison 

Apart from free mortgage advisory services, some home loan consultancy sites also have tools to allow you to compare loan packages across different banks. For example, the online home loan comparison system at www.iCompareLoan.com do that in 4 simple steps. You only have to input a few pieces of information, such as the loan quantum, duration, type (fixed or floating rate), and the system will display all the available loans that meet the search query. Figure 1 and 2 illustrate this system.

Figure 1: Step 1 of Loan Comparison System  

Source: www.iCompareLoan.com/new_loan 

Figure 2: Step 4 of Loan Comparison System 

Source: www.iCompareLoan.com/new_loan 

3. Home Loan Reports 

A handful of these mortgage consultancy sites may even provide more sophisticated home loan reports, which are available for free or a small fee. www.iCompareLoan.com offers a loan analysis system, which coincidentally is Singapore's most advanced. They give out one-time complimentary reports from this system. Various types of reports that compare loan packages can be generated from the system including interest cost savings from refinancing or new loans, building-under-construction loans, amortisation tables, and more. Figure 3 shows the log-in page.

Figure 3: Loan Analysis System 

 Source: www.iCompareLoan.com/consultant/ 

Usefulness of home loan consultancy sites

1. Save time and effort 

There are about 16 banks in Singapore offering over 50 types of mortgages. If you were to do the research yourself, you would have to trawl through numerous banks' websites to learn about the loans they provide. But more often than not, the websites will not even state basic information about the loans, like whether there is a lock-in period and clawback period or the interest rates payable.

Instead the websites will encourage you to contact them for more details. You would have to speak to over 10 bank officers if you were to conduct a thorough search. As a home loan is a major financial commitment, it will be wise to have comprehensive information before selecting a loan package. And a home loan consultancy site will make this task a whole lot simpler.

At the most basic level, the free DIY loan comparison tools offered by the consultancy sites allow you to compare loans in only a few steps, with the results displayed in easy-to-read table forms.

If you are in need of more comprehensive advice, you can contact the mortgage consultants.

Loan features can also change every now and then. It may be difficult for a novice to keep abreast of all the latest loan information. Mortgage consultants, on the other hand, are in the know so they are well-positioned to advise you accordingly.

2. Unbiased loan advice 

Because the mortgage consultants are not direct staff of the banks, they will give you unbiased loan recommendations and comparison across different banks. Conversely, if you were to turn a bank directly, the officer will naturally try to sell their loan packages. The officer is also unable to advise you about packages offered by other banks.

Mortgage consultants, however, have knowledge of packages across different banks and are not beholden to any.

3. Extra assistance 

Besides dispensing loan recommendation, most mortgage consultants are also happy to help out in the application process. Paperwork can be time-consuming, so the consultants can assist you by ensuring all the required documents are in order. Otherwise, your loan application can be delayed.

In some cases, the mortgage consultants may even be able to negotiate for a better rate, or facilitate the approval process, if the loan amount is above S$2 million.  

Read more articles at  
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/

How Do I Compare Home Loans in Singapore?

by SUSAN TEO

Taking a mortgage to finance a residential property is a heavy financial liability for most; thus it is a decision that shan't be taken lightly. This article provides a starting point and some basic things to consider before shopping for a mortgage.

Loan types

You can select from an array of loan packages available in the market. These can be broadly classified as

• Fixed rate loan
• Variable (floating rate) loan
• Combo (hybrid) loan
• Cashback or cash-incentive loan
• Interest-offset loan
• Interest-only loan [Do note that interest-only mortgages for residential properties have been disallowed by MAS (Monetary Authority of Singapore – Singapore's central bank) since14 Sep 2009, MAS Notice 632]

To read about the exact definition of each of these, go here.

The most popular types are the fixed-rate package and variable (floating rate) package. For the former, the interest rate are only fixed for a period of 2-5 years, after which rates are allowed to float. The latter, however, has rates that fluctuate throughout the loan duration. The interest rates for fixed rate are usually higher than for variable, in order to compensate the bank for keeping rates stable. To understand more about the nuances between the two and which to select, do look at our previous article: “Fixed-Rate Versus Floating Rate Home Loan Packages in Singapore: Which is Right for You?”.

Further, for each of the 6 types listed above, you may find different variants. For example, for the Variable (floating rate) loan, the interest rate can be SIBOR-pegged, SOR-pegged or an average of SIBOR or SOR. Others may also offer a cap on the upper limit of the interest. For a detailed discussion about choosing between a SIBOR or SOR based loan, read “Understanding SIBOR and SOR Based Home Loans in Singapore”.

If you feel flushed by the myriad of loan types and muddled by which to choose, you should consult a mortgage consultant.

Interest cost

Interest is the cost of borrowing. So naturally it is a key deciding factor when selecting a loan. You will not want to pay an excessive price for borrowing; therefore take note of the interest rate over the entire life of the loan, not just in the beginning. To compare the interest payable for different loans, you can make use of the loan analysis system at iCompareLoan.com, which can generate reports showing the interest incurred for all the mortgage packages in Singapore. Figure 1 and 2 show a snapshot of the interest comparison tables and charts to be found in our reports.

Figure 1

Figure 2

 

 

Conditions of the package

• Lock-in period (or commitment period)
• Clawback period (or reimbursement period)
• Conversion (or repricing if there is no cost involved)

Interest costs aside, you should look out for other features in the package that can add to the cost of the loan; particularly, when you intend to make partial or full repayment, refinance or sell the property in a few years' time.

Any repayment during the lock-in period (normally the first 2 to 5 years of the loan) will result in a penalty of usually at most 1.5% of the redeemed amount. But some packages do not come with a lock-in period. You can consider these if you foresee early repayment.

The clawback period, on the other hand, is the period (typically the first 3 years) in which a full redemption of the loan will incur a refund of all the freebies given such as legal subsidies, valuations, etc. The cost of these perks usually total $2,000 to $3,000.

Do note that MAS passed a ruling stating that cash rebates (including legal subsidy and stamp duties) offered in a mortgage have to be deducted from the purchase price, which effectively lowers the loan quantum. This has caused many banks to stop offering subsidies of any sort since mid-2012. However for those that still do, there may remain a claw-back period.

Finally, some loan packages have a free one-time conversion (repricing) to another loan package with a different interest rate or structure. So before you refinance, you should ask your current financier if they offer free repricing. Repricing can less costly then switching to another financier.

Read more articles at  
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/  
iCompareLoan.com/resources/category/faq/