How Home Loans Work

Key Takeaways

The HDB Loan Eligibility (HLE) letter and property loan fact sheet contain the terms of your loan and show how rising interest rates could affect your repayments
For bank loans, variable rates will kick in after the fixed rate lock-in period ends (differs by loan package)
Refinancing a home loan may help you save on the interest
Making a partial pre-payment can help you lower your monthly loan payments and save on the interest as well

What Is A Home Loan?

An HDB loan or home loan is money borrowed from HDB or the bank to help you buy your property. For HDB flats, you may also be able to tap on housing loans at a concessionary interest rate, subject to HDB's criteria.

With a home loan:

Your property is used as collateral for the loan
The amount granted is based on eligibility
The loan is disbursed after the downpayment is made, when you pay the remaining purchase price to the seller
Interest is charged from the first disbursement

Who is Eligible for a Home Loan?

HDB and the banks will have their own eligibility criteria for prospective borrowers. These include:

Minimum monthly income
Buyer's minimum and maximum age
Loan quantum
Residency status
Fulfilment of the Monetary Authority of Singapore’s property loan rules and HDB's/ the bank’s internal credit requirements

If you are self-employed or do not have a regular income, you must demonstrate the ability to service monthly instalments to be eligible for a loan. Each lender will assess your eligibility based on its criteria.

Types Of Home Loans

HDB offers a concessionary loan for HDB buyers only, at an interest rate that is pegged at 0.1% above the CPF Ordinary Account interest rate. This interest rate is revised in line with the revision of CPF interest rates.

For banks, there are two main types of home loans:

Fixed-rate loans
Floating or variable rate loans

Here's how they compare:

Fixed-Rate Loans

Rate is fixed and will not change for the first few years (promotional rate)
Rate does not change even when market rates fall
After a fixed rate period, interest becomes variable

Floating Or Variable Rate Loans

Rate varies and is usually tied to a reference rate e.g. CPF Ordinary Account, Singapore Overnight Rate Average (SORA) or a rate determined by the bank (e.g. internal board rate)
If the reference rate goes up, the interest payable will increase and vice versa

The reference rate can change at any time, depending on the prevailing market conditions. Banks must inform you in advance (usually 30 days) before they change the interest rate on your housing loan.

To understand the differences of the various bank loan packages better, ask your bank to explain:

How the reference rate is derived
How often this interest rate may be reset
Under what circumstances the rate is changed
What special features, if any, apply and if these will be removed or amended later

Note: A promotional rate is lower than the rate for the remainder of the loan. Make sure you know how much your monthly payments will increase when the promotional period is over.

How Interest Is Computed

The common method of calculating interest is monthly reducing (monthly rest).

Even a small increase in interest rates can affect your monthly instalment and the effective interest rate that you will end up paying for your loan.

To illustrate, here's what happens to the monthly instalment for an S$800,000 30-year loan at different interest rates using monthly rest method:

Interest Rate	1.24%	1.42%	1.61%
Effective Interest Rate (EIR)	1.5%	2.5%	3.5%
Monthly Instalment	$2,760	$3,160	$3,592

Tip: Even if you are eligible for a bigger loan or a longer loan tenure, do not take it up unless you are sure you will have the resources to fund it.

What You Can Do: Pre-pay Your Home Loan

You can consider making a lump sum pre-payment on your home loan to reduce your monthly payments and save on interest over the long run. Be sure to check if there are any penalties first.

Example: Partial pre-payment

If you have an outstanding home loan of $800,000 over 25 years, and you make a one-time partial prepayment:

Prepayment amount (% of outstanding home loan)	$40,000 (5%)	$80,000 (10%)
Monthly home loan payment	$4,440	$4,210
Total interest saved over remaining loan tenure	$30,150	$60,300

Note: Assuming that the home loan interest rate rises to 5% per annum and remains at that level for the remaining loan tenure of 25 years. Subject to the terms and conditions of your home loan — check with your lender.

All About Your Loan

Check the HDB Home Loan Eligibility Letter (HLE) and property loan factsheet for more details about your home loan.

HDB Loan Eligibility Letter

To find out if you are eligible for an HDB loan and the maximum amount you can borrow, you will need to apply for an HDB Loan Eligibility (HLE) letter.

HLE helps you plan for your home purchase by giving you information on how much you can borrow, the monthly repayments, the amount of cash you need and other terms and conditions.

Tip: An HDB loan comes with certain eligibility criteria such as an income ceiling. Check if you qualify.

Property Loan Fact Sheet

Before you sign up for a home loan with a bank, the bank must provide you with a property loan fact sheet.

It highlights how possible increases in interest rates will affect your monthly instalments and contains the key features of the loan, including:

Loan amount and tenure
Total repayment amount
Lock-in period
Interest rate and repayment schedule
Rate change illustration
Effective interest rate
Penalty fees

Ask your bank to take you through the fact sheet so that you know what you are committing to when you take up the loan.

Refinancing And Repricing

Refinancing means switching from your existing home loan to a new lender with lower interest rates. Refinancing at your current bank is called repricing, or conversion.

You should review your home loan regularly to see if you can save money by refinancing, particularly if your lock-in period is over.

Note: HDB flat buyers are not allowed to refinance their existing bank loan with an HDB loan.

Before You Refinance

Before refinancing, consider if you are better off:

Sticking to your current housing loan package
Converting to a different housing loan package with your existing bank
Taking up a refinanced housing loan package with a different bank

Go through these steps to check and compare your options:

1. Check With Your Current Bank

Ask your existing bank for repricing options before checking with other banks. Check whether the lock-in period still applies to your loan. If so, certain penalties may apply.

Ask your bank the following questions:

Will I incur a fee for terminating my current housing loan package e.g. penalties within the lock-in period, claw backs, additional legal fees or conversion fees?
Can I convert the loan to one which is more attractively priced? What charges are involved?
Is there a lock-in period for the new housing loan package? If so, how long is it and what charges are involved?
Can you show me how I will be better off with the refinanced package?

2. Compare Loan Packages

It's always a good idea to compare the repriced loan from your current bank with other refinancing packages to see if you should switch. You should compare:

The updated repayment schedules for the various packages – check the interest payable
The advertised rates and Effective Interest Rate (EIR) for the packages

Your instalment amounts and interest rates will likely change if you change your loan package. Banks are required to provide you with a residential property fact sheet to explain the key features of the loan package. Take this opportunity to ask questions such as the penalty fees for early loan repayment, or bundled products, such as mortgagee interest policy, and compare with other loan packages to understand the differences.

3. Read The Fine Print

Before committing to a refinanced housing loan package:

Read the terms and conditions and understand what the new package offers
Check the CPF Housing Withdrawal Limit applicable to you when you refinance your housing loan

What If You Cannot Pay?

If you have trouble keeping up with your monthly payments, approach your mortgagee quickly (HDB or the bank). HDB may be able to better advise you on alternative options while the bank may be able to help you restructure the loan.

Your home loan is secured against your property. In case of a loan default, HDB or the bank has a first charge and the CPF Board has a second charge on your property, if CPF savings have been used for downpayment or to service the loan.

If you fail to make the home loan payments when they are due, the first charge allows HDB or the bank to sell your home and use the sales proceeds to pay off what you owe the bank.

The CPF Board is entitled to the remaining sales proceeds to recover what has been deducted from your CPF OA.

Tip: If you are using CPF to service your housing instalments, it makes sense to pay off the loan by the CPF withdrawal age of 55, due to the lower CPF contributions from age 50 onwards. With lower contributions to your Ordinary Account, you may have to use more cash for the loan repayments.