So here is a continuation to Understanding The Basics Of Housing Loan In Singapore – Part 1.
In Part 1, we have explained some important terms that will help you make sense of housing loans in Singapore.
Let’s start off from where we left and talk about how much you can / should borrow for your dream house.
How Much Can I Afford?
As long as you satisfy some key criteria, banks will generally lend you up to 80% of your house’s value. In order to determine how much to lend you, banks consider a number of factors such as:
- Your earning capacity – the higher your income, the easier it is to obtain a house loan from the bank. This is because the higher earnings make you better equipped to repay the loan (which means its is less risky for the bank)
- Your existing debt – This includes your current debt such as your car loan, personal loan and credit cards. More existing debt makes it harder it is to get a housing loan from the bank.
- Your savings – once again, the higher your savings, the easier it is to get a housing loan.
A good rule of thumb to determine how much you can afford is to ensure that your monthly home loan repayment doesn’t exceed a third of your income.
Another way to check your affordability is by calculating your personal Debt Service Ratio (DSR). DSR is calculated as [all your monthly debt repayment obligation] divided by [your monthly take-home income]. Housing development Board recommends that Singaporens do not exceed a Debt Service Ratio (DSR) of 30-35%.
So now that you know how much you can afford, the next most important question is – how much you should borrow?
This is a difficult question to answer, howeverm there is no corrector wrong answer. You should not borrow more than what you can afford. Also, you should be prepared to pay a higher monthly instalment if you take up a home loan with a shorter term, or choose a higher margin of financing (can’t remember what this is? Check out Part 1 of this series).
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