What is a housing loan?
A secured loan that you as the borrower puts up the title to the property as collateral for a loan used to purchase it. If you don’t repay the debt according to the agreed repayment schedule, the mortgage lender can enforce foreclosure on the property and sell it off to repay the loan that is due to them.
In simplicity, the housing loan that you have taken up is secured against your home. Failure to repay the loan according to the agreed upon repayment schedule can result in you losing your home. So before you commit to a Singapore housing loan, you should have a good look at the loan structure and use tools like a housing loan calculator to forecast whether you can comfortably afford the home loan repayments.
Main components of a housing loan
- Loan quantum amount – the amount of financing that the lender is willing to offer. It can be typically up to 80% of the market value of your home or purchase value, whichever is lower.
- Housing loan Interest rate – the interest that the lender will charge annually. Housing loan Interest rate can be on flexible rate, fixed rate, or combination of both over the whole tenure of the housing loan.
- Tenure – the duration over which the mortgage loan is supposed to be repaid. This can be up to 30 years or more depending on your current age and the prevailing retirement age.
Singapore housing loans are generally repaid on a monthly basis. The repayment amount consist of a portion of interest and a portion of principal. A proper housing loan calculator should illustrate this clearly to you. You will know how much you are paying for interest and how much for principal with little deviation.
Significance of housing loans in Singapore
People take up housing loans to purchase property or refinance their existing homes while generating usable cash. Buyers typically buy houses for 2 purposes. It can be for “owner-occupied” where you buy the house for your own occupation, or “investment” where you buy the house to rent it out and make capital gains in future when the home value appreciates.
Housing loan refinancing occurs when a home owner pays off the existing mortgage with another from another lender. It can be because of better home loan interest rates or that the owner wants to generate cash from the home equity built up over the years. Generally, home owners only consider refinancing after the loan lock-in period so as not to incur expensive penalty charges. Savvy property investors may refinance more often so as to generate cash out from the home equity to invest in more properties. Cashing out on home equity is also commonly considered as housing loans usually have lower interest rates for other forms of loans like a personal loan in Singapore. So refinancing serves as a good alternative to other loans when the home owner needs cash.