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How to Identify Your Mortgage Goals in 2023 and Plan for the Year Ahead
Whether you’re planning to buy a new house or are an existing homeowner in Singapore, you should give deep thought to your mortgage goals in 2023. The time of near-zero market interest rates is over: in 2022, global interest rates rose dramatically. Mortgage interest rates in Singapore increased significantly too. Currently, they hover between 3.4 and 4.5%; significant, given that property prices in Singapore are at least six-figure sums.
Finding a suitable mortgage can be difficult for many Singaporeans. On top of comparing interest rates between packages, you’ll need to consider factors like how much you’re eligible to borrow from HDB or banks, based on criteria like your Loan-to-Value (LTV) limit and Total Debt Servicing Ratio (TDSR), and decide whether to use CPF to pay off your mortgage (and if yes, how much?).
Disclaimer: there’s no such thing as a ‘best’ mortgage in Singapore that works for everyone. Instead of simply signing on to a mortgage with the lowest interest rate you find through a quick search or the most heavily advertised promotion online, we recommend you filter your search by your financial situation and preferences.
No matter how new you are to setting your mortgage goals for 2023, we’ve put together a guide for you to navigate your home ownership or refinancing journey in Singapore. This should help you define your mortgage goals more thoughtfully, and send you on your way to find the ‘best’ mortgage for you this year.
What Is a Mortgage? (Definition, Meaning, How They Work)
Here’s one for those starting from scratch. If you have a mortgage and/or are familiar with how mortgages in Singapore work, feel free to skip to the next section of this article.
A mortgage is a type of loan you can use to finance a property or land. It’s a faster, and one of the most common ways, to buy a house in Singapore without paying its full price with cash upfront. Mortgages are commonly referred to as, and used interchangeably, with home loans.
4 Parts of a Mortgage Payment
1. Loan Amount
This is the amount of money you’re granted by a lender. In Singapore, this is mostly either HDB or a bank. This can go up to 80% (HDB loan) or 75% (bank loans) of the property’s price or value. By law, you cannot take out a full loan, i.e. 100% of the property’s price.
2. Down payment
This is the amount of money you need to pay for your house upfront, usually the percentage of its price not covered by your mortgage. Depending on the type of property you’re purchasing, you may be able to tap on your CPF to make down payment. It is typically 20% to 25% of the property’s purchase price or value.
3. Mortgage Interest Rate
This is the interest rate at which you can borrow money from a bank or HDB to finance your house. There are many types of packages, but they’re most commonly pegged to fixed or floating rates. This determines the interest you will incur (i.e. money on top of the dollar-to-dollar value you’re already required to repay the lender).
4. Loan Tenure
This is the time your mortgage is valid for (i.e. how many years you have to repay what you borrowed). In Singapore, the maximum loan tenure can be up to 30 years (HDB flats) or 35 years (non-HDB properties). If you find your current loan tenure unsuitable for your needs, you may consider refinancing to renegotiate the terms of your mortgage.
5 Factors to Consider When Choosing a Mortgage in Singapore
Reminder: the best mortgage for you may not be the best mortgage for someone else. Everyone has different mortgage goals, financial situations, and preferences. Thus, everyone is likely looking at different mixes of factors and risks when finding the best mortgage for their needs.
That said, here are common factors home buyers should take note of when comparing multiple mortgage options.
1. Getting the Lowest Interest Rate or Paying the Least Interest
If you’re searching for a mortgage with the lowest interest rate, here’s the good news: there are plenty of mortgage options in Singapore, and their interest rates can vary considerably. Coupled with market interest rates that fluctuate all the time, choosing one mortgage over another can save you ultimately thousands of dollars.
Note: be careful when you read or hear ‘lower’ interest rate. ‘Lower’ can refer to savings upfront, in the near future, or in the long term. While a mortgage may have a ‘lower’ interest rate at the time of borrowing, mortgages can be pegged to floating rates (variable and pegged to the fluctuation of benchmarks like SORA) or fixed rates (guaranteed for a number of years before reverting to a floating rate). This means that ‘lower’ now may not be ‘lower’ forever.
2. Deciding How Often to Check Your Mortgage
Often, there is a need to balance how much you prioritise paying as little as possible, with how much effort you’re willing to put in to manage your property. Put simply, if you want to consistently enjoy the best promotional rates and pay the least interest, you inevitably need to put in more work.
If securing a low interest rate is your goal, then you need to ask yourself how often you intend to refinance your house. Interest costs tend to shoot up after your mortgage lock-in period ends, usually one to three years. At the same time, refinancing mortgage interest rates are typically the most competitive in the market.
However, refinancing requires active commitment on the homeowner’s part. You’ll need to keep track of when you are eligible to refinance without penalty (i.e. after your lock-in period, compare the latest packages on the market, and apply for them). For some, that much effort may be worth paying more for.
At PropertyGuru Finance, we strive to make this process a little easier with our SmartRefi tool. It helps you to automatically track your existing mortgage against daily rates, and you can sign up for alerts to notify you whenever there is a golden refinancing opportunity to be taken.
Another important consideration to take note of when you are looking to refinance is the added costs of refinancing. Refinancing involves fees such as legal and valuation fees, which can add up. Most of the time, these costs are mitigated by subsidies provided by banks, but such promotions are seasonal and shouldn’t be taken for granted.
3. Quickly Pay off Your Mortgage
Many homeowners who are not concerned about month-to-month cash flow often aim to be debt-free as soon as possible, striving to reduce their overall cost across the duration of the entire loan, by minimising the dollar amount of interest they have to pay in the long run.
If you fall into this category, a mortgage that accomplishes this goal optimally would strike a balance between the following factors: low interest rate, short loan tenure, and no prepayment charge.
A ‘low’ interest rate changes according to your goals and situation. It could either be an interest rate that is lower in the long term (if you intend to keep the mortgage) or lower in the immediate future (if you plan on refinancing in a few years).
Additionally, one of the best ways to keep interest rates low is to reduce the number of instalments your mortgage is spread out into – in other words, to shorten the loan tenure. Fewer years on your loan means paying less interest and a larger proportion of each instalment going to paying off your loan principal. However, a shorter loan tenure means higher monthly repayments, so make sure you are able to sustain this payment schedule! If you can afford to go for a short tenure from the get-go, take each refinancing cycle as an opportunity to review your remaining loan tenure.
Besides your loan tenure, another good way to reduce the amount and time you take to pay off your home loan even further is to make prepayments whenever you have the cash, using lump sums to pay off parts of your loan principal. Some banks and mortgages include pre-payment charges that may erode any potential savings from interest, so if your goal is to reduce total payments overall, and you foresee being able to afford pre-payments, you should be looking for a mortgage that does not charge you for it.
Finding a mortgage with a specific combination of factors may be harder than just shopping for one in general. To make the search much faster and easier, turn to those who have knowledge of all the mortgages in the market, like PropertyGuru Finance’s mortgage experts, and let the analysis be done for you by experienced industry veterans.
Alternatively, if you’re more DIY and want to figure it out for yourself, you can also sift through all the available home loans from major banks and institutions in Singapore with our home loan comparison tool.
4. Build an Emergency Fund
Not to be pessimistic, but considering the current economic outlook – inflation is rising and economic growth is expected to slow – it’s perfectly reasonable to prioritise planning for a rainy day.
A mortgage is a large commitment, and when choosing your mortgage, you might want to consider how you may be affected if something untoward happens. For example, if you lose your job and do not have income for a few months.
What would most directly help tide you through is your savings – specifically, your CPF OA savings. The funds in your CPF OA grow at 2.5% p.a., which is a decent rate. If this is your priority, it’s a good idea to grow your CPF as much as you can, and only tap into it when necessary. You can do this by paying more cash every month, i.e. leaving more in your CPF.
5. Get the Lowest Monthly Mortgage Payment
Due to the nature of home ownership in Singapore, most young couples take on a huge financial commitment from the beginning of their marriages. This often leaves them cash-strapped and having to choose the mortgage option that gives them the lowest monthly repayments their bank accounts will allow for.
If you are in such a situation, you’ll want to look for mortgage packages that offer you the longest loan tenures to spread out the amount payable over time, resulting in lower monthly instalments.
In the short run, this will allow you to fall within a favourable TDSR and keep monthly repayments more manageable. However, do remember that since you will be charged interest for a longer period of time, you are likely to end up paying more interest in the long run.
Do take note of your age and income at the time you are borrowing (as well as your partner’s). The older you are, the less wriggle room you have to play with loan tenure as a factor in your mortgage, as your LTV limit is slashed if your intended loan tenure will persist after you turn 55 years old.
Bringing in a younger joint borrower may help average the age for the purposes of the lender’s calculations. But that only helps if the joint borrower is also earning a commensurate income that gives their younger age the necessary weightage. The joint borrower also needs to be a homeowner in order to be considered. This isn’t very feasible for most homeowners, so it’s best to plan ahead to avoid such a sticky situation.
How to Find the Best Mortgage in Singapore (2023)
Although 2023 started with mortgage interest rates at a high, experts do expect rates to moderate in the second half of the year. Read more in our Singapore Property Market Outlook 2023 report. High rates will not last forever, and with proper planning and the right guidance, it will be possible to tide through this period unscathed. After all, a mortgage can span over several decades. It’s more of a marathon than a sprint.
In that case, we suggest relying on PropertyGuru Finance’s mortgage experts to help you arrive at the best decisions and mortgage choices, and to help you do the necessary applications to ensure success.
With our mortgage experts, you will remain in control of the process but benefit from seasoned expertise that will take into account both your short- and long-term goals, as well as any future refinancing or selling decisions that you may have, to help you find the best path to arrive at the optimal outcome for your own unique situation. Planning not just for now but for the future is what professionals do best and we suggest taking full advantage of their skillset to secure a better financial future for yourself.
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Disclaimer: Information provided on this website is general in nature and does not constitute financial advice.
PropertyGuru will endeavour to update the website as needed. However, information can change without notice and we do not guarantee the accuracy of the information on the website, including information provided by third parties, at any particular time. Whilst every effort has been made to ensure that the information provided is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult a financial planner or your bank to take into account your particular financial situation and individual needs. PropertyGuru does not give any warranty as to the accuracy, reliability or completeness of information which is contained on this website. Except insofar as any liability under statute cannot be excluded, PropertyGuru and its employees do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person.
