How Do You Calculate Your Housing Loan?
When you are looking for a housing loan in Singapore, there are a few important things you need to consider.
The amount of money you can borrow, the interest rate, and the loan term all determine how much your monthly payments will be.
In this article, we will walk you through how to calculate housing loan in Singapore. Let’s get started.
What Is A Housing Loan?
A housing loan, commonly referred to as a home loan, is a secured loan that a financial institution provides to individuals and families looking to purchase a home.
The loan is secured by the property itself, which acts as collateral. If the borrower cannot repay the loan, the lender can foreclose on the property and recoup its losses.
Using a home loan calculator in Singapore, you will be able to understand how to calculate housing loan.
You can also calculate how much you can afford to borrow and the monthly repayments you will need to make.
What Are Some Types Of Housing Loans?
There are two main types of housing loans:
- Housing loans for private property
- Housing loans for HDB flats
Housing Loans For Private Property
Banks or other financial institutions in Singapore typically give housing loans for private properties. There is a wide range of interest rates and packages available.
Depending on your monthly installment budget and income, you can choose a loan package that suits your needs.
Housing Loans For HDB Flats
If you want to buy a HDB flat in Singapore, you can apply for a housing loan from HDB.
This is only possible if you or your spouse are Singapore citizens or permanent residents.
The interest rate for a HDB housing loan is pegged to the prevailing CPF Ordinary Account (OA) interest rate, which is currently 2.6%.
If your CPF OA interest rate changes, your house loan interest rate will also change.
However, it is unlikely this will happen as the CPF Board reviews the interest rates every year.
What You Need To Calculate Your Monthly Mortgage
The amount you have to pay every month is called the mortgage.
To calculate your monthly mortgage, you need to know the value of the housing loan, the interest rate, and the loan tenure.
Value Of The Housing Loan
The value of the housing loan is the price of the property you buy, minus the downpayment.
The downpayment is the amount of money you put down upfront, typically 20% of the property price.
For example, if you buy a $500,000 property, your downpayment will be $100,000. The downpayment is essential as it lowers the lending risk for the bank and affects the amount of money you need to borrow.
The interest rate is the cost of borrowing money from the bank, expressed as a percentage of the loan amount. The higher the interest rate, the more you will have to pay back to the bank.
For example, if you take a $100,000 loan with an interest rate of 3% per annum, you will have to pay the bank $3,000 yearly.
However, if the interest rate is 4% per annum, you will have to pay the bank $4,000 yearly.
The loan tenure refers to the number of years you have to repay the loan. The longer the loan tenure, the lower your monthly installments will be.
However, you will pay more interest to the bank over the loan’s lifetime.
It is essential to choose a loan tenure that you are comfortable with. For example, choose a shorter loan tenure to save on interest payments if you can afford to pay higher monthly installments.
However, opt for a longer loan tenure to lower your monthly installments for less pricey monthly installments.
Calculating The Value Of Your Property
Calculating the value of your property is essential because it will affect the amount of money you need to borrow, as well as monthly installments.
There are two types of property valuation in Singapore:
- Indicative valuation
- Actual valuation
This is a rough estimation of the value of your property based on the following factors:
- Prices of similar properties in the same area
- Recent transactions of similar properties in the same area
- Size of your property
- Type of your property (e.g. condo, HDB flat, etc.)
Your property agent can do this, or you can estimate the value yourself by researching on the internet.
This is a more accurate valuation of your property done by a third party, or professional valuers. The valuation report will be based on factors such as:
- Renovation value
- Value of maintenance
You can use three methods to get a valuation of your property in Singapore:
- Comparison method
- Income method
- Cost method
This is also known as comparative market analysis. It is the most common method used by professional valuers in Singapore.
It is based on the principle that the cost of acquiring an equally desirable property in the same area will be the same as the valued property.
The maximum cost that investors are willing to pay for a property will be the same as the amount they will use to buy or construct a similar property in the same area.
It is based on the principle that the value of a property is equal to the income it generates. The most common type of income generated by the property is rental income.
This method is used to value properties that generate income, such as investment properties and commercial properties.
It is also known as the residual method. The valuer uses the cost of construction and land, less depreciation, to estimate the value of a property.
It also includes factors such as fees paid to authorities, professional fees, and developers’ profit.
How To Calculate Your Mortgage Payment
There are many different calculators that you can use to calculate your bank loan monthly installment. You can try using a:
- Bank HDB loan calculator
- CPF housing loan calculator
Calculating your mortgage payment is essential to know how much you need to pay monthly.
It is also an excellent way to compare different bank loans and choose the one that is most suitable for you.
However, it would be wise to consider that you will be much better off using a Singapore mortgage loan calculator to calculate your mortgage payment.
Using the mortgage calculator, you will be able to know how to calculate housing loan.
Step-By-Step Procedure For Calculating Your Mortgage Payment
There are a few steps that you need to follow to calculate your mortgage payment.
Step 1: Determine Your Mortgage Principal
The first step is determining how much money you will borrow from the bank.
For example, if you are buying a $500,000 property and putting down a $100,000 downpayment, then your mortgage principal will be $400,000, which is the remaining amount you need to borrow from the bank.
Step 2: Determine Your Monthly Interest Rate
The next step is to calculate your monthly interest rate. This is the amount that the bank will charge you every month for borrowing the money.
The interest rate is usually expressed as a percentage of the loan amount. It is calculated by dividing the annual interest rate by 12.
For example, if the annual interest rate is 3%, then the monthly interest rate will be 0.25%, which is 3% divided by 12.
Step 3: Calculate The Number Of Monthly Payments
The next step is to calculate the number of monthly payments that you will need to make. The tenure of the loan will determine the number of monthly payments.
For example, if you are taking a 30-year loan, you must make 360 monthly payments (30 years x 12 months).
Step 4: Calculate Your Monthly Installment
The last step is to calculate your monthly installment. To do this, you need to use the following formula:
M = P[r(1+r)^n]/[(1+r)^n-1]
- M = monthly installment
- P = mortgage principal
- r = monthly interest rate
- n = number of monthly payments
Let’s say you are taking a $400,000 loan with an interest rate of 0.25% for 30 years.
Using the formula above, you will get a monthly installment of $1,609.96.
You get this value by inputting the values into the formula:
M = 400,000[0.0025(1+0.0025)^360]/[(1+0.0025)^360-1] = 1,609.96
Factors That Affect Loan Amount And Tenure
Many factors will affect the amount of money you can borrow from the bank and the loan tenure. These include:
- Age: The younger you are, the higher the loan amount you can borrow and the longer the loan tenure can be. You are less likely to default on the loan as you have a longer working life ahead of you.
- Income: The higher your income, the higher the loan amount you can borrow and the shorter the loan tenure. You can afford to repay the loan faster, and you are less likely to default.
- Credit score: If you have a good credit score, you will be able to borrow a higher loan amount, and the interest rate will be lower. You will be considered a lower-risk borrower.
How Much Mortgage Can You Afford?
The general rule of thumb is that you can afford a mortgage that is 2-2.5 times your gross income.
This means that if you earn $5,000 per month, you can afford a mortgage of up to $12,500.
However, this is just a general guideline. You should still consider other factors such as your other debts, monthly expenses, and downpayment.
What Is The Maximum Loan You Can Get?
The lender determines the maximum loan you can get by considering factors such as your income, outstanding debts, credit score, and the property’s value.
The lender will also consider the loan-to-value (LTV) ratio when determining the maximum loan amount.
The LTV is the loan amount divided by the value of the property. For example, if you buy a $500,000 property with a $100,000 downpayment, the loan amount will be $400,000, and the LTV will be 80%.
In Dec 2021, the Monetary Authority of Singapore (MAS) announced that the maximum LTV for housing loans was reduced from 90% to 85%.
This means that if you buy a $500,000 property, the maximum loan you can get from the bank will be $425,000.
Calculating Your Housing Loan Is Important
The amount you decide to borrow is a very important factor that determines the loan amount.
So be sure you know how to calculate housing loan, so that you don’t end up paying more than what is affordable for your budget.
At Horison Credit, we want to help make the home ownership process as smooth and stress-free as possible.
We are a trustworthy licensed money lender that offers competitive rates and personalised service so that you can find the perfect loan for your needs.