The Financial Network

Quick Guide to Mortgage Home Loan Terms – For the New and Unfamiliar

From someone who either just got their Option to Purchase (OTP) and is looking for a new loan, to someone who already has a loan and is looking to refinance, it is common for homeowners to be overwhelmed by the various jargon that pop up during conversations with the bankers or found in their loan contracts.

Let’s examine what these terms are, and the things to look out for when reviewing the terms and conditions.

We’ll break down the terms into three different periods of having a loan.
They are:

  • Looking for new loan packages / Looking for another loan package
  • Financial Assessment and Letter of Offer
  • Already has an existing Loan

When Looking for New Loan Packages here are the terms you want to know:

Loan to Value (LTV

This is the percentage (of property valuation) that the bank can legally loan to the borrower, depending on their loan count. 
For 1st loan: max LTV of 75%
For 2nd loan: max LTV of 45%

Total Debt Servicing Ratio (TDSR): 

The percentage of your income that can be used to service all your debts (home loans, car loans. Personal line of credit, etc) on a monthly basis. Currently, TDSR is at 55%. Based on 55% of the borrower’s income, the bank will assess the maximum loan the person can borrow, assuming they were to use 55% of income to pay their monthly instalments.

Medium-Term Interest Rates 

The Medium Term Interest Rate Floor is set by the MAS, which usually is above the current market rate. MAS expects all Financial Institutions to be prudent when assessing the maximum loan an individual can take on, by assuming a (higher than current) interest as the medium-term interest rate. When calculating how much a borrower can borrow, the bank will use this Medium Term Interest Rate Floor + a buffer. This helps ensure that a borrower can service their loan even if interest rates rise unexpectedly over the medium to long term.

Mortgage Servicing Ratio (MSR) 

For Public Housing (including newly launched Executive Condos), Banks will compute the MSR, in addition to the TDSR. MSR is the ratio of a borrower’s monthly income that can be used to service all his mortgage loan(s), excluding non-mortgage debt servicing. This is currently at 30%.

Compounded 1M SORA / 3M SORA 

This refers to the Singapore Overnight Rate Average (SORA). This rate replaces the previous SIBOR rate which is supposed to be more volatile. For Floating Rate packages, this is currently the most commonly used Reference Rate. Available in either a 1-month average (1M) or 3-month average (3M), compounded 1M/3M SORA refers to the average of the daily SORA rates over the stipulated duration, and can be tracked via MAS website.

Lock in Period

This is the period of time that the borrower will not be able to change the interest rates or terms of the loan, or switch out to another loan. Otherwise, a penalty will apply which typically amounts to 1.5 percent of the outstanding loan. As such, the borrower is being “locked in” to the current bank. The lock-in period is usually 2 or 3 years. 

Fixed Interest Rates

This is the fixed interest rate (that does not vary with market interest) that the borrower will have to pay during the lock-in period. Once the lock-in period is over, the loan will switch to a floating rate ( commonly pegged to Compounded 1M/3M SORA) plus a Spread. Fixed Interest rates will result in fixed monthly instalments and hence, provide more predictability for the borrower. 

Floating Interest Rate

 This is an interest rate that periodically adjusts up or down to reflect economic market conditions. This is often accompanied by a spread dictated by the bank, and the spread usually goes higher year after year. Your monthly instalment amount will vary every 1 month or 3 month, as the Effective Rate changes in tandem with the daily fluctuations in 1M or 3M SORA. 

Here are some important terms to note during a Financial Assessment or a Letter of Offer:

Valuation Fee

A fee incurred when the bank appoints a Valuer to assess the value of your property. This fee is paid by the borrower even though the Valuer is appointed by the bank. It varies depending on property type, property value and the bank. Take note that should the valuation come up to a much lower figure than your purchase price, the bank might reassess your loan eligibility. For property value below $3 million, the valuation fee should be below $500.

Legal Fees / Conveyance Fees

When refinancing or making a new purchase with a loan, a lawyer will be required to represent the buyer/borrower and draft the necessary legal documents for the mortgage loan and/or purchase.  As such, you are expected to incur a certain amount of legal fees, which varies according to the law firm appointed. Generally, the cost is between $2000 to $3000.

Tip: always appoint a law firm that is on the panel of both banks. Otherwise, you will end up having to appoint 2 law firms which will increase your costs unnecessarily. 

Cancellation Fee

This applies to loans that have been approved, but have not been disbursed. Usually, it affects owners of properties that are Buildings Under Construction – that is, uncompleted projects. The Cancellation Fee is often 1.5% of the undisbursed loan amount. 

Tip: if you are refinancing your home loan and also in the midst of trying to sell your property, you have to make sure that the Completion Date (in the event you manage to sell your property relatively quickly) of your property sale must be AFTER the Date of Disbursement by the new financier. Otherwise, you will incur the Cancellation Fee because the new financier has not disbursed the loan to your existing bank, and yet your property has been sold. 

Prepayment Penalty / Full Redemption Penalty

This applies when the borrower decides to pay off his loan partially or fully while within the “Lock-In” period. This will often incur a fee between 0.75% – 1.5% of the amount of loan partially or fully redeemed. 

Tip: to avoid such penalties, look for loans with provisions for making partial prepayment. If you have intention to sell your property in the next 2 years, look for loans with waiver of penalty upon the sale of the property. This might save you tens of thousands of dollars. 

Cash Gift / Cash Benefits / Cash Rebates / Legal Subsidies

These are only applicable to Refinancing loans only. These are cash rewards that the bank offers the borrower who is refinancing to them, to help cover part of the Legal Fees involved. The Cash reward is usually 0.4% of the loan, and often is capped at around $2000 – $2500. Do note that for new purchase loans, such rewards are NOT applicable.

Finally, here are some terms to look out for as an existing homeowner:


This is when you are moving your loan from one bank to another. It is often used when borrowers find another bank who are offering a better loan package than their existing bank. Note that you can only Refinance after your lock-in period. Otherwise, penalty applies. 


This is when you are changing loan packages within the same bank. Note that you can only Reprice after your Lock-In period, unless there are special provisions that allow you to convert to other packages within the same bank during the lock-in period. 


This is tied to the Cash Gift / Cash Benefit / Cash Rebate / Legal Subsidies. These rewards often come with a 3-year claw back period, where if the borrower Refinances their loan packages to another bank within the 3 year period, the Borrower will need to pay back the Cash Gift / Rewards given to them.

Waiver Due to Sale

This is a feature tied to the Full Redemption Penalty. If a loan is fully paid up during the lock-in period, he will have to incur the 1.5% penalty. However, if his loan comes with a provision that allows for waiver of penalty in event of a sale, the penalty fee will be waived after the borrower submits proof of sale. 

Free Conversion After XX Months

This is a feature that allows the borrower to change or convert to another loan package within the same bank without incurring a penalty. This feature only applies after the loan has been in force for a certain amount of time, such as 1 year or 2 years.

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