If you know nothing about mortgage jargon as a beginner, buying a home for the first time will be overwhelming.
Unfamiliar terms from “LTV” to “lock-in periods” can confuse you and make you feel lost as you go through the process. But don’t worry as our guide can help introduce these mortgage terms with simpler explanations.
What a Home Loan Actually Is
What is a home loan?
A home loan is the money you borrow from a lender to buy a property, at the cost of repaying monthly instalments with interest. Although appearing simple, the process is complex and the true cost is beyond property price.
What is a mortgage?
A mortgage is the legal arrangement behind the home loan. It is usually interchangeable with home loan, referring to both definitions.
In legal terms, the property is taken as “collateral” by the lender for the home loan, meaning that failure to repay the loan will risk your ownership of the house.
Who are the people in the loan?
- The borrower is the person applying for a loan to combine with their income to afford the property price.
- The lender gives the loan and charges interest under their own rules. They can be HDB or a financial institution regulated by the Monetary Authority of Singapore (MAS).
- A co-borrower is an additional person you want to apply the loan with together, sharing incomes for affordability and responsibility when repaying the loan.
Home loan basic working:
- When buying property, its price is split between an upfront payment and the remainder.
- The upfront payment has to be done through your own money,
- The remainder is instead covered by the home loan borrowed from the lender.
- To repay the loan, you pay through monthly instalments over a loan tenure by the lender.
What is a monthly instalment?
A monthly instalment is the amount you pay each month to repay the home loan, usually consisting of principal and interest. Repayment deadlines are set by loan terms.
No monthly instalment is the same and may even increase depending on interest rate type, impacting your financial freedom.
When comparing loan packages, our free mortgage repayment calculator can help discover your monthly instalment.
What is the loan principal?
The loan principal is the original borrowed amount from the lender.
For example, if a property costs S$800,000 and your upfront payment covers S$300,000, the principal is the remaining S$500,000, depending on the final loan structure and limits. Over time, your repayments reduce this principal.
What is an interest rate?
The interest rate is the cost of borrowing the principal.
Interest is charged by the lender on the outstanding loan balance monthly during the tenure, thus costing more than property price.
Consider whether you can comfortably pay every monthly instalment even if the economy changes over time.
Explore more on loan principal and interest rates with our guide.
What is the loan tenure?
| Tenure Length | What It Means | Pros and Cons |
| Longer | Lower monthly repayments | Manageable monthly payment; Stay indebted longer |
| Shorter | Higher monthly repayments | Less total interest paid over time. |
The loan tenure is the length of time you are given to repay the loan.
Tenure can range between 20 to 30 years or be any approved period depending on relevant factors. Length impacts how comfortable your life would be with the loan structure.
Factors Affecting Loan Amount
These terms relate to what affects your final loan amount, including debt. If you’re pressed for cash, lenders may doubt your ability to pay them back.
What is an In-Principle Approval (IPA)?
An In-Principle Approval (IPA) is an early indication from the lender of how much it may be willing to lend you, based on your financial profile at that point in time.
It is not the final loan offer, but helps you and other first-time buyers search for houses under the likely loan amount.
Check out our IPA guide to learn more.
What is Loan-to-Value (LTV)?
Loan-to-Value (LTV) refers to the percentage of a property’s value that can be financed with a loan.
For example, if a property’s price is S$100,000 and the applicable LTV limit is 75%, the maximum amount that can be paid by loan would be S$75,000.
The remaining amount has to be paid through your down payment, using cash or CPF.
What is Total Debt Servicing Ratio (TDSR)?
Total Debt Servicing Ratio (TDSR) measures how much of your gross monthly income goes towards repaying all your monthly debt obligations.
Lenders use TDSR to assess whether you can manage the debt load before granting you the loan. It is capped at 55% of a borrower’s gross monthly income, acting as a limit on your overall debt burden.
Basically, when a borrower takes on a mortgage, the total monthly repayments should not exceed 55% when added with other debt repayments such as car loans.
Learn more with our in-depth explanation.
What is Mortgage Servicing Ratio (MSR)?
Mortgage Servicing Ratio (MSR) is a separate borrowing limit which ensures you do not have to fully repay the loan with your gross monthly income.
It is capped at 30% of your gross monthly income by MAS and applies together with TDSR when purchasing HDB and executive condominiums (EC). What this means for you is that you will have to satisfy both limits simultaneously.
What is HDB Flat Eligibility Letter (HFE Letter)?
The HDB Flat Eligibility Letter (HFE) is a document to apply for to determine whether you are eligible for purchasing a flat, specific CPF housing grants and your maximum loan amount.
Check out our guide on HFE Letter to learn more about its benefits to your homebuying journey.
Upfront Costs Before Buying a Home
Buying a home doesn’t start and end at only the property price. There are many fees you have to pay before even touching it to finalise your homebuying journey.
What is a down payment?
A down payment, sometimes called upfront payment, is the portion of the property price you pay with your money, instead of financing it fully with your home loan. Personal resources like cash or CPF savings can cover this amount.
What are option fees and exercise fees?
| Fee | What It Means | What it Does |
| Option | Amount you pay to secure the Option to Purchase or OTP. | Reserves right to buy |
| Exercise | Amount you pay to exercise the option and proceed with the transaction. | Confirms you are moving ahead with purchase |
Both are the earliest transaction costs that appear in the buying process. They are not the same as property price.
For more information on OTP, check out our dedicated guide.
What is stamp duty?
Stamp duty is a tax payable on certain property transactions in Singapore.
What is Buyer’s Stamp Duty?
Buyer’s Stamp Duty (BSD) is the standard and compulsory stamp duty payable when you buy property in Singapore. It’s calculated based on purchase price or market value of the property. BSD may increase as the value increases.
Use our BSD calculator to help determine the cost now.
What is Additional Buyer’s Stamp Duty (ABSD)?
Additional Buyer’s Stamp Duty (ABSD) is an extra stamp duty that may apply depending on the buyer’s profile and the number of residential properties already owned.
Although not applicable to first-time Singapore Citizen buyers, it applies to Permanent Residents buying their first residential property.
Learn more with our in-depth explanation on ABSD.
What are legal fees and conveyancing fees?
Legal fees and conveyancing fees are the costs of the legal work needed to complete your property purchase and loan arrangement.
This is for ownership transfer and mortgage-related paperwork. Although it can be covered by CPF, eligibility rules apply so you should still account for it in your budget for buying a home.
Types of Interest Rates
As stated before, interest is when lenders charge you extra on the outstanding loan balance over the years for their lending service. There are various types of interest rates.
What is a floating rate home loan?
A floating rate home loan means the interest rate can rise or fall over time, thus changing your monthly repayment as well.
It is linked to a reference rate so whenever this reference rate increases or decreases, the floating interest rate will do the same. Recommended if you want flexibility and if your finances can handle unpredictable changes in repayment.
Explore your floating rate package options now with our guide.
What is a fixed rate home loan?
A fixed rate home loan means the interest rate stays the same for a fixed period.
For example, a loan package gives a fixed rate of 5% for three years in which it doesn’t change during this time.
It becomes a floating rate only after the set period. Recommended if you want stability and to know what the monthly instalment should look like.
If you are unsure whether to pick fixed or floating, this in-depth comparison should help.
What is SORA and why does it matter?
Singapore Overnight Rate Average or SORA is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore.
Many floating-rate home loans are tied to SORA, meaning that whenever it changes, the interest rate will change too and affect your monthly repayments.
If you are interested in SORA-rate packages, check out our in-depth SORA guide.
What is a spread in a floating-rate package?
The spread is the extra percentage the bank adds on top of the reference rate in a floating-rate loan package.
For example, if linked to SORA, your total interest rate is determined by both SORA and a spread. Spread also makes the difference in cost between floating packages with the same reference rate.
What does effective interest rate mean?
The effective interest rate (EIR) is the rate that reflects the true cost of borrowing more accurately than the advertised headline rate. It’s used to help buyers compare loan packages despite their appealing smaller advertised headline rate.
For example, loan packages A and B advertised their interest rate as 10%. EIR helps by accounting for their own reduced principal over loan tenure and upfront costs. It will then reveal that A has a 10.2% effective interest rate while B has 10.4%.
Therefore, you as the buyer are informed of both packages’ true cost and can make decisions accordingly.
Mortgage Package Terms to Be Careful of
What is a lock-in period?
A lock-in period is the period during which you are tied to your home loan package and cannot freely exit or change it without consequences.
If you attempt to sell the property, upgrade or change packages, you’ll be charged for breaking the package terms by the lender. It is not the same as loan tenure.
What is an early repayment penalty?
An early repayment penalty is a fee the lender may charge if you repay the loan too early, especially during the lock-in period. It’s a consequence of attempting to switch loan packages or leave mortgage contracts early.
What is partial repayment and full redemption?
Partial repayment means paying back part of your loan ahead of schedule, while full redemption means paying off the entire outstanding home loan.
Both are generally beneficial if you want flexibility with your loan burden. However, not all loan packages offer these terms and you still have to abide by the lock-in period.
What is repricing?
Repricing means switching to another loan package with the same lender, instead of moving your mortgage to a different bank. It’s a recommended option if you feel dissatisfied with your current package and want to switch to a better one offered by the same lender.
Check out this guide if you are unsure on repricing or refinancing.
What is refinancing?
Refinancing means moving your home loan from one lender to another. Unlike repricing, you are changing both lender and loan package.
It’s a good option to use in the future when your chosen package is no longer appealing compared to when you first bought it.
Check out our refinancing process guide for more information.
What is a free conversion option?
A free conversion option is a feature that lets you switch to another pricing package without paying a conversion fee, depending on the lender’s terms.
When market rates change over time, this allows you flexibility to change packages at a low cost.
What is subsidy clawback?
Subsidy clawback means that if you leave the package too early, the lender can reclaim specific benefits offered when you first took the loan.
For instance, they helped to subsidise some legal fees but because you’re exiting early, they will take back the subsidy.
Conclusion
Where to seek further help?
If you still feel unsure or need further financial guidance, you could go to a mortgage broker or home loan specialist. They can help you go over your options and evaluate your suitability for one, without pressuring you.
Our mortgage broker team at Ace Mortgage can provide and simplify the loan process for you.
Final Thoughts: Be Patient as You Continue Learning Mortgage
Even with this glossary, learning doesn’t stop here.
You will still have to research more before making your final decisions but at least you are now equipped with basic home loan knowledge. When comparing loan packages, ensure that you remain patient and fully understand the fine print.
Buying a home is a long-term commitment and not a normal quick purchase.
