Ms Lisa Ho Asst. Vice-President, Home Financing, Personal Finance Services UOB
Q1 : A1 :
When should one arrange for financing for a property purchase? You should decide right from the start how you intend to finance the purchase of a property. This is especially relevant because CPF Board will only allow the withdrawal of CPF funds from people who are named as purchasers of a property. Co-owners must be related by birth or marriage if CPF funds are to be used. When planning your finance, it is important to bear in mind the sequence for the release of funds which is as following : Cash CPF Bank Loan
What is the maximum amount of financing that Banks & other financial institutions can extend to borrowers for the purchase of a private residential property? Based on the current MAS guidelines, buyers will need to pay the first 20% of the purchase with their own cash. This means that the maximum financing quantum is 80% of the purchase price or valuation of the property (whichever is lower). This will include the upfront CPF lumpsum monies that buyers can utilise from their CPF ordinary accounts because CPF has the first charge against your property if you default on repayments. If you currently own a home and want to sell it before getting a new one, you might want to consider bridging loans.
Some banks offer bridging loans which help you to pay the 20% downpayment for your new home before you realise the cash from the sales of your existing property. You should take note that bridging loans can be released only if you have already contracted to sell your existing home, evidenced by the Sale & Purchase agreement or HDB appointment letter. You will also need to note that the repayment period for bridging loans is short term, usually up to about six months (based on MAS guidelines).
Banks are currently offering attractive deals like a two or three-year fixed home loan interest rates. What are the factors to consider whether fixed rate is better than floating rate, i.e. board rate discount? The advantages of fixed rate is that a customer will not be subjected to interest rate fluctuations during the fixed period. The customers can be assured of the loan installment amount without worrying about the uncertainties in the interest rate market. This is particularly true at times if the customer takes a view that interest rates are low and they wish to “lock” in the rates at this point in time. Although some banks offer lower rates on floating basis, i.e. board rate discount, it may move up or down at the bank’s discretion at any point in time. A greater discount in board rate does not mean a better interest rate offering. It all depends on the absolute interest rate given; not withstanding the bank’s right to adjust the board rate in accordance to market conditions.
Housing loan usually changes to board rate or prime rate after the fifth year. What essentially is the difference between the board rate and prime rate? Prime rate is defined as the interest rate that is offered to the banks’ best customers. It is the rate that is offered across the board to all customers within the bank, regardless of the customers or product segments.
Prime rate is affected by money market conditions and is determined according to interbank rates. On the other hand, Board rate takes into consideration on the bank’s funding position and is unique to the specific product or target segment. For example, a bank will have housing loan board rate that is different from say, a car loan board rate. Q5 : When deciding on the bank loan or financing package, what are the things that buyers should look out for ? Of course one should look at the interest rates offering. While banks and financial institutions currently offer attractive interest rates for the first few years, customers should also look at the interest rates for the longer term. Other than the interest rates, one should look at the total package being offered. Among the terms and conditions, one should also look for the penalty clauses which penalises you for early loan repayments, in case you receive a windfall and wish to pay off your loan earlier. Nowadays, we see banks competing to entice customers by giving freebies such as free legal subsidies, free credit cards, free air tickets, free club memberships, etc. It is also important to choose a bank that you feel comfortable banking with as buying a home is usually a long-term commitment. You should select a bank that can provide you with good & reliable personalised after-sales service, preferably with your own customer relationship manager to attend to you with a complete suite of other products & services to cater to your overall financial needs. Some things you may wish to ask yourself : Is the property for short or long-term investment or for owner-occupation? The loan package for each situation is different. How much CPF money is available as this will affect the bank loan that you require If you are selling your existing home, how much cash do you expect and when would it be available. A good customer relationship manager should be able to assist you on the above. Q6 : For a new purchase, how much legal fees & stamp duty are payable? Can CPF funds be used to pay for the legal fees and stamp duty?
The amount of legal fees that you pay will depend on the price of the property, your loan amount and the amount of CPF funds that you will be withdrawing. As a gauge, the amount of legal fees payable will range between 0.75% 1% of the purchase price of the property. However, as most banks are now subsiding part of the legal fees (0.5% of the home loan amount), the amount of legal fees paid by buyers is significantly reduced. You may wish to check with your lawyer on the actual fees you will have to pay and when you will have to pay for it. Stamp duty is tax levied on documentation involving disposition or transfer of interest from one party to another. Only documents which have been duly stamped are admissible in court as evidence, and registrable at the Registry of Land & Title deeds. Stamp duty is calculated as : [3% x Purchase Price] less $5,400. Stamp duty and legal fees can be used from your CPF account provided that the total bank loan + all CPF to be used (lumpsum purchase + legal fees + stamp duty) does not exceed 80% of the purchase price or valuation of the property. If in doubt, please clarify with your banker or lawyer.