Your Handy Guide for Financing Your First Home
Key Takeaways:
- 1. Understand how much you can borrow to purchase a new home in Singapore.
- 2. Learn about in-principle approval (IPA) and what it means.
- 3. Understand the TDSR and how to improve it.
Buying your first home in Singapore
Buying your first home is a long-term financial commitment that can last up to 25 years or more, depending on your home loan. Read our guide to get answers to some of the most important questions you may have about financing your first home.
How much can you borrow for a new home?
The first factor for how much you can borrow for a new home depends on the Loan-to-Value (LTV) ratio, which is the maximum amount you can borrow from lenders.
Here are the applicable LTV ratios for purchasing your first home:
Figures listed in the table are correct at time of writing.
Based on the LTV limit above, if you purchase a 3-room executive condominium (EC) for S$800,000, the most a bank can lend you is S$600,000. That means you would need to pay 5% in cash (S$40,000) and 20% in CPF and/or cash (S$160,000).
If you are looking to purchase a HDB or EC, you must also consider the Mortgage Servicing Ratio (MSR). The MSR places a cap on the monthly amount you can pay on your mortgage at 30% of your gross monthly income. If you and your spouse have a combined gross monthly income of S$10,000, the most you can pay on your mortgage is S$3,000 a month.
The second factor determining how much you can borrow for a new home depends on your Total Debt Servicing Ratio (TDSR), which is based on your gross monthly income and monthly debt obligations. TDSR is currently capped at a maximum of 55% of the borrower’s gross monthly income.
The TDSR framework was introduced in 2013 to regulate responsible lending and borrowing for home loans1. Here is the formula you need to know to determine your TDSR:
What is factored in TDSR calculations?
As shown in the examples above, computing your TDSR comes down to two essential components–how much you earn and how much debt you need to pay down each month.
Let us look at the sources that make up your gross monthly income:
Do note that only 70% of income from variable sources are counted toward TDSR computation.
Gross monthly debt includes at least 20% of the monthly repayment instalment of any of the below items where the borrower is a guarantor. Hence, you will need to determine how much you spend on each of the repayments below:
- • Credit cards
- • Personal loans
- • Student loans
- • Automobile loans
- • Renovation loans
- • Any other secured or unsecured loans, including revolving loans.
Now that you know what is factored into TDSR, you can look at how to improve it.
How can you improve your TDSR?
The TDSR threshold of 55% can pose a challenge to first-time home buyers. If you are looking to reduce your TDSR, you may do one of two things–increase your monthly income or lower your monthly debt level.
Here are several ways you can improve your TDSR:
Adjust the loan tenure or make a bigger down payment
One of the simplest ways to lower your monthly home loan repayments is to extend the loan tenure.
Include other sources of income
Include any regular or variable sources of income to help boost your gross income. This includes, but is not limited to, the following:
- • Property rental income
- • Commissions
- • Bonuses
- • Side businesses income
- • Freelance income
Only 70% of income from variable sources are counted towards TDSR computation. Submission of proper documentation, such as payslips and invoices for your other sources of income, helps in improving the computation of variable income that is added into your gross income.
This will make it easier for banks to review and factor such income into your TDSR.
Reduce your debt obligations
You can also free up more TDSR borrowing power by reducing your monthly debt obligations.
Some things you can do to cut down on your monthly debt obligations include:
- • Repaying any car loan by selling your car and using carsharing
- • Spending less on your credit cards by cancelling any subscriptions or memberships you rarely use
The faster you reduce these debt obligations, the quicker you can improve your TDSR.
Look at making a fixed deposit to raise your income
Another option is to consider a deposit with the bank providing your home loan.
By making a deposit, the bank may consider it as supplemental income to boost your TDSR.
If you are not comfortable making a larger down payment and do not mind putting your money in a secure place where it will earn some interest, this option is worth considering.
Speak to a mortgage advisor for more information on this option.
Consider your co-borrower carefully
Having a co-borrower for your home loan can be a double-edged sword. Depending on their financial situation, a co-borrower can significantly increase your TDSR borrowing power or make it worse if they have too many debts.
To maximize your TDSR, you must take caution and understand your co-borrower’s financial situation before committing to the co-ownership of a property.
This means you will need a truthful account of your co-borrower’s gross monthly income and debt obligations, as the TDSR will be factored based on both buyers’ aggregate monthly income and debt obligations.
Depending on the combined TDSR, you will need to decide whether you are comfortable to proceed with a property purchase. This means either waiting for your co-borrower to pay down debt or purchasing a less costly property within your TDSR limit.
What is In-Principle Approval (IPA)?
An IPA or In- Principle Approval is an estimate given by mortgage lenders (usually banks) on how much they are willing to lend prospective home buyers before making a property purchase.
Keep in mind that the amount they agree to lend you may or may not be the amount you need to purchase your dream home.
When banks assess you for an IPA, they look at your loan eligibility based on your TDSR and credit history.
Having an IPA is strongly recommended before signing an Option-to-Purchase (OTP) to buy a property. The OTP allows you to essentially “reserve” a property with the developer for a booking fee. However, this is only valid for 2 to 3 weeks.
If you sign an OTP without first obtaining an IPA from a bank with the required loan amount in time, you risk not being able to obtain the requested loan amount to finance the property and therefore not able to exercise the OTP. Hence, you will end up forfeiting the booking fee–which is 1.25% of the property price.
What’s next after obtaining IPA?
Depending on your bank, an IPA may be valid for a period of up to two months after obtaining it. This gives you time to look for and secure a property through an OTP.
Having an IPA also gives you visibility over what you can afford, which can guide your expectations on what is realistically affordable.
Once you have found the right home, you can submit your OTP to the bank, which will be used to complete the loan application. The final home loan package you receive will depend on many factors, including your TDSR, credit score, property market value, and any remaining lease on the prospective property (if any).
Buy your dream home with Citibank
Take the first step towards financing your dream home with Citibank’s attractive home loan packages. Check out our mortgage calculator and speak to a mortgage advisor today. Or you can start applying now for an In-Principle Approval (IPA) on our website.
Sources:
1. For bank loan customers, please refer to Notice 632 from the Monetary Authority of Singapore for further information: https://www.mas.gov.sg/regulation/notices/notice-632
2.For individuals with a HDB loan, please refer to the relevant application website: https://www.hdb.gov.sg/residential/buying-a-flat/buying-procedure-for-new-flats/sign-agreement-for-lease
3. Refer to MAS introduces Debt Servicing Framework for property loans at https://www.mas.gov.sg/news/media-releases/2013/mas-introduces-debt-servicing-framework-for-property-loans
Disclaimer:
This article is for general information only and is not intended to be a forecast of future events nor a guarantee of future results and should not be relied upon as financial advice. All views and opinions are as of the date hereof, and are subject to change based on market and other conditions without notice. The examples listed here are purely for illustrative purposes and should not be relied on as facts. Any rates listed in the article are correct at time of writing. The article has no regard to the specific objectives, financial situation and particular needs of any specific person. It is neither an offer nor a solicitation to purchase, nor endorsement or recommendation of any products or services mentioned therein, and the products or services mentioned may or may not be offered by Citibank Singapore Limited, its related entities and their respective directors, agents and employees (together "Citigroup").
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