When getting a mortgage, often one of the first questions asked is “how much can I borrow for a home loan?”; however, that’s not the first thing you should ask.
Before you determine how much you can borrow from a financial institution, you should first determine how much you can afford. Banks are inclined to loan you a large amount, but they need to determine your ability, so they need to look at whether you can make the housing loan repayments.
Therefore, it is less about how much you can borrow but more about how much you can repay safely. This article goes over the different factors affecting how much you can borrow for a home loan.
How much can you afford for a home?
Getting a dream home is a large expense, but people are generally willing to invest. The important thing is to smart with how you handle the money you want to spend before you take a large housing loan, as you’ll have to make mortgage payments for many years.
You should consider many factors when determining what you can afford, like the upfront costs, your own ongoing expenses, and the monthly debt repayments you have to make.
The first thing you should consider is whether you have enough money for the upfront costs. These expenses may include the downpayment, option fee, commission fees for the agent, stamp duty, legal costs, renovation costs, valuation fees, and more.
You will have to find out the purchase price of the HDB flat/private property, and you also have to determine how much you had prepared, including cash savings from your gross monthly income, savings in your CPF account, and the net proceeds from when you sold your home (if applicable).
The next thing to determine is the ongoing expenses that will take a chunk out of your monthly income and cannot be paid using your CPF. You need to have enough to pay for
- Monthly expenses like mortgage insurance, management service fees, and property taxes
- Fluctuation of interest rates resulting in an increase with floating-rate home loans
- The likelihood of a drop in property value and the original LTV limit is exceeded.
When you settle a housing loan, you have to make monthly repayments. These mortgage payments consist of two amounts, the principal payment and interest payment. Principal repayment refers to the loan quantum distributed throughout the loan tenure, while interest payment refers to the value added by interest rates.
All in all, your monthly instalments will depend on the home loan amount you’ll borrow, the loan tenure, and the loan’s interest rate.
Note that a longer loan tenure for the same amount will mean you will have smaller monthly payments but a larger total amount spent overall.
How much should you borrow?
We are well aware of how much houses will cost, and the high amount poses a risk for financial institutions. While they want to grant you a bigger amount for a bigger profit, they have to follow Singapore’s rules.
Singapore wants to keep its citizens safe from financial troubles that come with too much debt, and as such, they have certain factors that banks and financial institutions look at before approving an HDB loan.
These are the mortgage servicing ratio (MSR), the total debt servicing ratio (TDSR), and the loan-to-value ratio (LTV) limit.
Mortgage Servicing Ratio (MSR)
This indicates the proportion of your gross monthly income that is used to service your mortgage loan.
Your monthly HDB loan or Executive Condominium (EC) loan payment must not exceed 30% of your gross monthly income.
MSR = Monthly Mortgage Repayment / Gross Monthly Income
Total Debt Servicing Ratio (TDSR)
The total debt servicing ratio (TDSR) indicates the proportion of your gross monthly income used to pay all your monthly debt payments. This means if you have other debt obligations like credit cards or a car loan, it can affect your TDSR. And all obligations should not exceed the TDSR threshold of 60%.
TDSR = All Monthly Debt Repayments / Gross Monthly Income
Loan-to-Value Ratio (LTV) Limit
The loan-to-value (LTV) limit determines the loan quantum ceiling you can borrow for housing loans. This is granted after considering the following factors:
- All existing debts and credit
- Mortgage loan term
- Monthly repayment amount in proportion to gross monthly income
- Any discount, rebate or other benefits given
LTV = Loan amount / The Property’s Purchase Price
Other factors that may affect the maximum home loan amount
Beyond these ratios, banks will also consider your remaining debt when it comes to an HDB loan and other home loans, even for other loan types. They will need to learn how much you owe to determine your ability to repay the loan with the terms and adjust the maximum amount accordingly.
Among other factors, they will look at the remaining lease on the property, the borrower’s age, the loan term, and of course, the credit history.
How can you increase your borrowing limit?
To make sure you can get a higher maximum loan quantum on a property loan, you should focus on adjusting a few factors in your favour.
Dropping a bigger amount of money can make it seem like you have a lot of cash savings. By making a bigger loan downpayment, financial institutions may be inclined to give you a higher maximum amount.
One quick way to be allowed to borrow more for a mortgage loan is to decrease other debts you may have. Settling a credit card or two can help in several ways and will lower your debt-to-income ratio may even boost your credit.
In a more long term sense, improving your credit will help increase the amount you can get from different financing options. The ways you can do this are:
- Repay loans on time.
- Don’t make multiple loan enquiries in a short time.
- Don’t have too many credit facilities open.
- Don’t default on your loans.
- Take and repay a loan to repair damaged credit.
Getting an HDB Loan
An HDB Concessionary Loan is the primary financing option for people who want to purchase HDB flats. The interest rate is 2.6%, and you and the amount can either be up to 90% of the property’s price or, depending on the assessment, whichever is lower.
To be eligible, the financial institutions will look at:
- The borrower’s age.
- Financial standing
Other eligibility requirements are:
- At least one buyer is a Singapore citizen
- Have not taken two or more HDB loans
- Gross monthly household income doesn’t exceed S$14,000 (S$21,000 for extended families)
- You do not own or have not owned any residential property in the 30 months before applying for the HDB loan.
- You do not own more than one market/hawker stall or commercial/industrial property*
HDB Loans vs Bank Loans
|Feature||HDB Loan||Bank Loans|
|Loan-to-Value (LTV) limit||Up to 90%||Up to 70%|
|Downpayment||10% can be fully paid using CPF||5% must be paid in cash, 20% can be paid in cash or CPF (also depends on the number of property loans you have)|
|Mortgage Servicing Ratio||30%||30%|
|Total Debt Servicing Ratio||–||60%|
|Interest Rate||Pegged at 0.1% above the prevailing CPF interest rate & reviewed quarterly (currently at 2.6%)||Fixed/floating (rate differs between bank loans)|
|Maximum Loan Period||Up to 25 years||Up to 30 years for HDB flat, Up to 35 years for private property|
|Loan Switch Availability||Can switch to a bank loan||Cannot switch to HDB Concessionary Loan|
|Chargeable Fees||No penalty for early repayment.
Late repayment fee of 7.5% per year, but more lenient.
|May incur early repayment fees, late repayment, management service fees, and fees for refinancing within the lock-in period.|
Should you get an HDB Loan or a Bank Loan?
The HDB Concessionary Loan is a government program, which means the borrower’s sake is kept in mind. You get a higher, but fixed interest rate and a larger quantum, making it an ideal option.
However, the income ceiling might lock you out of this particular option.
Getting a home loan from a bank will have lower but fluctuating interest rates, usually have a longer loan tenure, and be less strict.
The Bottom Line
When it comes to a mortgage, your ability to repay the loan (factoring in the different ratios and your credit history) will largely affect the amount you can borrow. Be sure to take control of the factors that can affect how much you can borrow to make sure you can get the amount that you need.
Of course, different financial institutions will have different standards, so a bank may give you the money in the amount you need.
To make your search easier, get help from Instant Loan. It is a loan comparison service that can give you a list of financing options from the top financial institutions in the country, all fitting your specific financial situation.