Singapore is first in many things, but we aren’t quite sure we should be proud of the fact that we have been named as the world’s most expensive city once again. While we may not feel the pinch when buying daily groceries and eating at the hawker centers, the picture is a world of difference when it comes to owning a car and buying a property.
Sky-high car and home prices here in Singapore are definitely shocking compared to those in other countries. However, those living here might already be so used to the situation of having to take out a loan when it comes to buying a roof over our heads. In fact, the little red dot has quite a good score of home-ownership that’s over 90%. Obviously made possible only with the help of mortgage loans, as most of us are definitely not millionaires.
Since it is quite the Singaporean dream to have a property to our name, it makes sense for us to understand the complicated terms bankers and mortgage brokers use when we take up a home loan. Having a basic understanding of the terms will help you understand what you are signing up for, since it is probably going to be one of the biggest financial commitments you make in your lifetime.
15 Important Terms and acronyms:
1. Home Loan/Mortgage Loan
It may seem like common sense, but some people neglect the fact that your home is used as a collateral when you take out a home loan. Missing repayments could result in losing the roof over your head.
2. Interest Rate
Interest Rate is the cost of borrowing. In terms of mortgage loans, they are usually classified as fixed, variable or board rate.
A fixed rate loan charges the same interest rate throughout the duration of the loan.
A variable rate loan offers rates that are changed periodically to match the benchmark interest rate it is following. You should ask the bank about the calculation of the variable rate and which benchmark they follow.
One of the most common benchmark rates is the Singapore Interbank Offer Rate (SIBOR).
3. Singapore Interbank Offer Rate (SIBOR)
SIBOR refers to the rate at which banks here lend/borrow funds from each other. It is quite common for banks in Singapore to use the SIBOR as a benchmark to price their home loans.
For instance, your home loan rates might be the 3-month SIBOR plus a margin rate charged by the bank.
4. Swap Offer Rate (SOR)
Another benchmark rate used to price home loans is the Swap Offer Rate (SOR). Comparatively, it is more volatile than the SIBOR as it takes into consideration the exchange rates between the US dollar and Singapore dollar.
The advantage of taking up a SOR-rate loan is that in a declining interest rate environment, the SOR is likely to fall faster than the SIBOR.
5. Approval-In-Principle/In-Principle Approval
Approval-In-Principle (AIP) is a non-binding pre-approved loan amount given by the bank based on the credibility of the borrower. This amount indicates how much you will be able to borrow and is useful in helping you limit the type of homes you can afford.
The AIP/IPA is typically valid for 30 days.
6. Letter of Offer
The bank will issue the borrower a Letter of Offer (LO) upon acceptance of the loan application. It is a contract that states the terms of the loan package offered.
7. Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) ratio is the amount you can borrow calculated as a percentage of the valuation of your property. LTV ratio may be up to 80% if you do not have any other outstanding loans.
8. Lock-in Period
The lock-in period refers to a set number of years where the borrower will need to stay with the loan package. There is usually a penalty should he/she decide to change the terms of the mortgage loan.
9. Early Redemption
An early redemption refers to the repayment of the home loan before the end of the loan tenor.
10. Valuation Fee
The bank will require a valuation of the property so as to calculate the maximum amount of loan they can lend. An independent valuer usually does the valuation and a valuation fee will have to be paid to determine the market value of the property.
11. Conveyance Fee
A conveyance fee is incurred for the legal and administrative work involved with the transfer of the ownership of the property from one owner to another. The lawyer will check through the details of the contract, ensuring that there are no restrictions on the ownership transfer.
12. Temporary Occupancy Permit (TOP)
A Temporary Occupancy Permit (TOP) is issued when the building works are completed. The building can only be occupied when a TOP is granted.
13. Joint Tenancy
Joint tenancy refers to a situation where all the owners of the property have an equal interest in the property; regardless of the amount of money each of them has paid for the purchase of the property.
Married couples usually opt for joint tenancy as the property is automatically passed on to the surviving co-owner(s).
14. Mortgage Reducing Term Assurance (MRTA)
A MRTA is a mortgage insurance that protects the borrower’s family from losing the home should the borrower pass away or become disabled before the home loan is fully repaid. This can be especially important if the borrower is the sole breadwinner of the family or have dependents.
While it is mandatory for all HDB flat owners to subscribe to the Central Provident Fund (CPF) Board’s Home Protection Scheme for those who are using their CPF to repay their housing loans, the same law does not apply to private property owners.
15. Refinance/ Repricing
Refinancing refers to applying for a new home loan with a different bank so as to replace the existing one. Most people do it so that they can take advantage of a loan with a lower interest rate.
You should check for any penalties you might incur if you cancel your existing loan, especially if it is still within the lock-in period.
You can also choose to reprice your loan by applying for a new loan with the existing bank if they currently have a better loan package for you.
At the end of the day, it is important to note that taking up a home loan is not just about the interest rate.
Neither is it about learning to understand the complicated jargon or overcoming the tedious paperwork process. Be sure to review them every now and then, or have someone who is an expert to get the job done for you!
Article contributed by Jacqueline Conceicao, Associate Director at Redbrick Mortgage Advisory.