This article was originally on GET.com at: 10 Essential Home Loan Terms You Should Know
When it comes to home loan contracts in Singapore, it's hard to escape the number of terms that get thrown in our face that look like complete gibberish. These are usually accompanied by lengthy pages of terms and conditions that most of us can't be bothered to read through.
While you may not need to understand every word stated in the documents, you should at least get a grasp of the list of 10 basic home loan terms below so that your home loan broker/banker knows you've done your research and will think twice about glossing over the details.
Since buying a home is probably one of your biggest life expenses, it pays to know what you're dealing with when you apply for a home loan. Understanding these terms will give you a clearer picture of the actual cost of the home loan and help you find out which type of home loan will be best for your own situation.
Here are 10 basic home loan terms that you need to know:
1. Approval-In-Principle (AIP)
Approval-In-Principle (AIP) is the approved home loan amount that the bank agrees to lend you when the time comes, based on your credit score and income.
Keep in mind that an AIP isn't a loan in itself, it's basically a guarantee from the bank that it will extend you a loan.
An AIP is really important because it can give you (and your real estate agent) an idea of the amount of money you are eligible to borrow. This way you can focus on properties that you can afford and not waste time viewing others that are out of your budget.
Another good reason to get an AIP before applying for a property is because this way you won't lose your booking fee. To secure a property you need to pay a deposit of 1 per cent of the purchase price, this is called a booking fee. If you're not able to get a loan for the property and can't buy the house, you will lose the booking fee.
You may think that 1 per cent is not a big amount, but let's see an example to get a clearer idea of what it could end up costing you. Let's say you purchase a flat that costs $500,000, the 1 per cent booking fee is $5000. If for some reason the bank refuses to give you a loan, you won't be able to buy the property and you'd lose $5000!
If you have an AIP this won't happen to you, because you already know that the bank will lend you the money! Property agents also take you more seriously if you have an AIP, and some might refuse to work with you if you don't have one.
2. Early Redemption
Early redemption is when you pay off your home loan before the scheduled loan term. Banks generally don't like this because it means that you end up paying less interest over time.
For this reason, you will usually have to pay a penalty fee if you want to pay back the loan earlier than the agreed term.
Make sure to ask the bank or financial institution that you're getting the home loan from if there is a penalty fee for early redemption.
3. Mortgage Insurance/Mortgage Reducing Term Assurance (MRTA)
Mortgage insurance covers the outstanding loan should the borrower die or get struck by an unfortunate event that leaves him with a total permanent disability (TPD) before the home loan is fully repaid, thus protecting the borrower's family from losing the home.
A mortgage insurance called Home Protection Scheme is compulsory for all HDB flat owners who are using their CPF to repay their housing loans.
Private property owners can have a choice on whether they want to take out a mortgage insurance (also known as MRTA or home loan insurance) with a private insurer.
4. Interest Rate
The interest rate is essentially the cost of borrowing. The bank gives you a loan, and in return you pay the loan back plus interest. In terms of home loans, interest rates are usually classified as fixed, variable (also known as floating) or a combination of both.
A fixed rate loan charges the same rate of interest for a specific period of time, usually 2 to 4 years. A floating rate loan will have interest rates that vary according to the benchmark that is used to price the loan.
5. Loan Tenure
Loan tenure refers to the number of years it will take to repay the loan. In Singapore, the maximum loan tenure for private property is up to 35 years, and the maximum loan tenure for HDB flats is up to 30 years.
6. Loan-To-Value (LTV)
Loan-to-Value (LTV) is the amount of money you can borrow as a percentage of the market valuation price of the property. LTV may be up to 80 per cent if you do not have any other outstanding loans.
This is how it works:
- If your loan tenure is less than 25 years and your loan will be fully repaid before you've reached the retirement age of 65: maximum LTV is 80 per cent
- If your loan tenure exceeds 25 years: maximum LTV is 60 per cent
- If the loan won't be paid off in full before you reach the retirement age of 65: maximum LTV is 60 per cent
- If your loan tenure is 30 years or less and will be fully repaid before you turn 65 years old: maximum LTV is 80 per cent
- If your loan tenure extends past the retirement age of 65: maximum LTV is 60 per cent
- If the loan tenure exceeds 30 years: maximum LTV is 60 per cent
- If you have 1 outstanding home loan: maximum LTV is 50 per cent
- If you have 2 or more outstanding home loans: maximum LTV is 40 per cent
- If the loan tenure exceeds 30 years and you have 1 outstanding home loan: maximum LTV is 30 per cent
- If the loan tenure exceeds 30 years and you have 2 or more outstanding home loans: maximum LTV is 20 per cent
7. Lock-In Period
A home loan's lock-in period refers to a set number of years that the borrower is 'locked-in' to a loan contract.
This means that if the borrower would like to change the terms of the loan while in the lock-in period, he/she will be penalised.
Refinancing means transferring your existing home loan to another bank or financial institution. It is usually done for the purpose of lowering your monthly loan repayments by getting a new home loan package with more attractive interest rates.
You should aim to refinance your loan after the lock-in period in order to prevent any prepayment penalties.
On the other hand, repricing is similar but instead of going to a different bank, you go to the same bank but choose a different loan package.
9. Singapore Interbank Offer Rate (SIBOR)
Singapore Interbank Offer Rate (SIBOR) refers to the daily interest rate that financial institutions in Singapore use when lending funds to each other. It is quite common for banks in Singapore to use the SIBOR as a benchmark to price their loans.
These can be based on the 1-month, 3-month or even longer term SIBOR rates. For example, a 3-month SIBOR home loan is a loan that is adjusted every 3 months to match the current SIBOR rate.
Your home loan rates will usually entail a spread that the bank adds on top of the SIBOR rate. One advantage of using a SIBOR-rate loan is that it is transparent and the data is published.
Read GET.com's essential guide to SIBOR and SOR pegged home loans here.
10. Swap Offer Rate (SOR)
The Swap Offer Rate (SOR) is more volatile than the Singapore Interbank Offer Rate (SIBOR) as it is based on the exchange rates between the US dollar and the Singapore dollar.
SOR pegged loans are not as popular as SIBOR pegged loans in Singapore, and not all banks offer this type of loan. Here you can see the main differences between a SIBOR and a SOR pegged home loan to find out which one is better for you.
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