Everything You Need To Know About The Affordability Calculator

Unless you’re a billionaire hotshot Ceo, you will need a housing loan to afford your next property purchase. 

You have a wide range of loan packages to choose from, all coming with varying features and regulations. 

Not to mention, all these loan packages will come at different rates, as well as rate types. 

If you want to buy a private property or try your hand at investing in commercial properties, you have to go for a loan from a bank. 

If you want to buy public property such as an HDB flat, you also have the added option of taking a loan from HDB. 

A lot of people prefer this because of the interest rate of 2.6 % per annum, which is fixed momentarily until they change it. 

Also, people trust HDB more since it is a government organisation that aims to help people find affordable public housing.

However, we have seen a lot of banks dole out tempting features to attract some of the HDB flat buyers in Singapore. 

One prime example would be the United Overseas Bank of Singapore. 

Your average UOB home loan is a combination of some great loan features wrapped neatly in a sellable package, and the same goes for a UOB HDB home loan as well. 

Either way, searching for an attractive home loan package will definitely introduce you to some heavy contenders. 

So how do you make sure that you are prepared to send a well-calculated loan application to any financial institution?

The answer is simple, just use a loan affordability calculator!

Now, you might be wondering, what on earth is an affordability calculator?

Well, it’s just like a loan repayment calculator and helps you figure out whether or not you can afford to take a particular loan. 

However, these two online calculators do have some minor differences that set them apart. 

The objective of an affordability calculator is to figure out the maximum loan amount you can borrow and flesh out the exact loan tenure you need to pay back the total borrowed via monthly instalments. 

This is done by taking into account your monthly income, including any variable earnings like rental income, and your other monthly debt obligations from personal loans, such as bills from credit cards, car loans etc. 

The affordability calculator will take in this information and present you with the maximum loan amount and maximum loan tenure that you should aim for. 

On the other hand, a loan calculator works the other way around by taking the same information and giving you a plan for how to repay the loan by figuring out the loan repayment schedule and monthly mortgage repayment amount for the loan tenor.

So, in simple words, a loan calculator or mortgage calculator is used to compute a loan, while an affordability calculator advises you on what loan amount you should borrow.

It is human nature for us to want the maximum bank loan that is allowed to use, obviously, no one wants to go for the minimum loan size, even if that’s what we should be doing. 

An affordability calculator slaps some much-needed sense into our brains and works to prevent us from financially overburdening ourselves. 

On a side note, one should also be aware of the legal fees attached to taking home loans, which is a crucial piece of information most people miss when calculating their loans. 

We recommend downloading the Consumer Home Loan Guide if you want the whole layout.

The good news is that there are no Consumer Home Loan Guide Download Fees and Charges, so you can access vital home loan information without having to pay for anything.

As we’ve explained before, taking a mortgage is no joke and requires you to spend a lot of time searching for the right one. 

Generally speaking, not all of us will have the time to spend weeks or even months calculating the pros and cons of every loan package.

Besides, the effects of the pandemic have set back the loan acceptance rate to an all-time low at the moment, which might dissuade many of us from seeking professional help.

You might not face many difficulties if you’re attempting to secure a minimum loan size; however, we can’t say the same if you want a larger housing loan quantum.

Plus, you might not be able to understand how interest rate works and might have trouble choosing between the exclusive home loan rates provided by banks. 

Not understanding how a particular rate package will play out through the years may severely hamper your ability to afford your loan repayments.

On top of that, you might not know how to factor in other legal expenses involved, such as property tax and fees from loan conveyancing matters.

Not to mention, there are so many terms that you might not understand, like what a prepayment penalty is or what a loan lock-in period means.

Clearly, you will need some help to make sure that you match the loan eligibility criteria.

That’s when you hear about the wonderful world of mortgage brokers who can do all the unwanted legwork and secure a desirable mortgage for you. 

What’s even better is that a lot of these brokers will charge nothing for the advice they give while providing access to a wide range of decent lenders. 

This just makes the whole prospect even juicier because, let’s face it, who in their right minds wouldn’t want to hire a mortgage specialist for free?

However, we’ve learnt from experience that nothing in the world comes for free, and that just might be the case for mortgage brokers. 

You see, they might not be charging you anything for the service they provide, but they will probably be getting a commission for the deal from the lender’s side. 

This leads you to face one big disadvantage; they won’t really have your best interests in mind. 

The primary goal of a mortgage broker would be to find the fastest way for you to secure a mortgage so that they can get paid. 

We aren’t saying that you can’t get a good deal from a mortgage broker; what we’re saying is that they might not care about any particular mortgage goals that you might have.

Plenty of people have taken the advice of a mortgage broker and have walked away with a desirable loan package.

But on the other hand, there are a handful of people who found out that they could’ve gotten a better deal from a different lender. 

Each scenario will have a different result, so it’s not really up to us to advise you against seeking financial advice. 

But to answer the question, are mortgage advisory services really free of charge; well, that’s a bit of a grey area there. 

We can definitely say that you’re getting a service for free, but it might end up costing you more. 

However, there are always a handful of firms whom you can trust with both eyes closed. 

For example, CKS Property Consultants Pte Ltd has been known to provide excellent consultation services regarding home loans with outstanding attention to what their clients want. 

In Singapore, the maximum home loan quantum allowed is up to 75% of the maximum property price. 

This percentage is set regardless of whether you’re buying an executive condo from a private seller or a new launch condo from a property developer. 

So, if the property you want to buy costs $ 1 million, then you can only borrow up to $ 750,000, provided you have the level of income to afford it. 

And, of course, just because you want to borrow a certain amount doesn’t mean that you can, so don’t think you can just barge in and try to get a loan for the costliest and largest property listing in the market. 

You need to fulfil the income required necessary to borrow that loan amount, which will be determined by calculating how much of your income you can allot for the monthly payments.

Assuming that there aren’t hiccups, you should be able to come up with a maximum loan amount that you can borrow. 

However, finding out the max loan amount that you can borrow is only one of the many steps you have to take while applying for a mortgage.

Once this is done, you can start the loan application process by filling out the application form.

The bank you’re applying to will ask for your income documents and also factor in other income sources as your variable income.

Obviously, the bank will need to know your assessable income to determine your total household income.

Other documents you might need are income tax statements, information on credit card debts, credit history etc.

Be aware that the bank might do a full credit assessment to determine whether or not you are a financial risk. 

This will prompt the bank’s credit committee to check your outstanding loan balance in case you have an outstanding home loan.

Once all the documents and application forms are submitted, they will go through a valuation process.

If everything goes well, you will be receiving an approval letter from the bank along with the particulars of the loan, such as loan amount sanctioned, monthly home loan instalment amount, loan tenure etc. 

If you want to receive the good news faster, you can opt to get an online loan approval notification from your bank. 

Calculating your affordability rate for an eligible loan is a matter of understanding how much you can pay on the monthly home loan repayments without financially straining yourself. 

This amount is determined by your household income, how much you are already paying on outstanding debts, and your downpayment amount, which can be paid with a combination of cash and CPF savings. 

An outstanding debt could be anything from a student loan or a short-term bridging loan that you might have taken in the past. 

For companies and corporations, this could also mean a short-term cash credit they might have borrowed from the bank.

If that is the case, they will need to evaluate the cash credit refer documents and see how much this can set them back on the property loan. 

Miscellaneous loans might not seem like a bad idea initially, but they can come back and bite you in situations like these. 

So, if you ever feel the need to take student loans, or motor vehicle loans, make sure that you think ahead. 

If you’re buying a car, try to put down enough downpayment so as not to take on the maximum car loan term possible. 

The sooner you free yourselves from these loans, the better your chances will be when it comes to home loans; in other words, it reduces your loan liability and increases your loan limit.

Having a shorter loan tenure for miscellaneous loans means that your credit lines will become free faster, giving you the option to pursue a desirable home equity loan.

However, when it comes to home loans, it might be so that you can only afford to clear the outstanding loan balance after a long tenure. 

Obviously, having a 7-year loan will mean that you either have to put in more downpayment or pay a higher amount on the instalment loans.

Alternatively, a 20-year loan will compel you to spend a smaller portion each month for a period of 20 years. 

While this might work better for some people, you should keep in mind that there could be a limit for loan tenure, depending on your age. 

It’s difficult to get a long loan tenure if the duration of the loan passes the age of 55-60. 

Alternatively, you could go for a loan after retirement, which would give you a better loan facility for that age. 

If you are buying an HDB, you should opt for a concessionary housing loan instead of the usual one. 

A concessionary loan from HDB features a concessionary interest rate which is currently fixed at 2.6% per annum.

How much you can afford depends on the current financial scenario you’re in. 

It can only be determined after calculating the downpayment amount, borrowing amount, loan tenure, interest rates, and miscellaneous actors like taxes, stamp duties, agent fees etc. 

While most of these factors are quite generic and can be easily calculated, the interest rates are a whole different story. 

There are countless banks that operate in Singapore, and each of them provides a different interest rate. 

The interest on HSBC SORA-pegged home loans will differ from that of an OCBC Home Loan. 

Adding to the complexity, the property type can also affect the loan package, leading to more differences in how the interests are compounded. 

For example, energy-efficient properties will give you the option to take on an eco-care home loan package. 

An OCBC Eco-Care Home Loan provides great benefits for a homeowner, reducing the overall energy consumption level of the home. 

Meanwhile, an HSBC Investment Property loan would be more favourable if you plan on buying a house to rent it out or sell it at a higher margin. 

Finally, there are all the rewards that banks give out to temp you into applying for a loan with them.

For example, if you get an OCBC Titanium Rewards Credit Card, you can potentially get discounts and cashbacks on various deals.

It’s like having a shopping voucher that might indirectly increase your loan affordability by reducing your current payments. 

All these miscellaneous factors also go into calculation while determining how much you can afford on your house.

You can calculate the mortgage servicing ratio by taking your monthly debt payments and dividing them by your total income per month. 

The formula for MSR is as follows:

(Monthly instalment/Monthly income) x 100% ≤ 30%

If you’re bad at math, then you’re in luck; there is an online MSR calculator you can use to get the job in seconds. 

All you have to do is monthly income, any miscellaneous earnings, and the amount you pay on the monthly deposits.

On a general scale, affordability calculators are indeed quite accurate and will never present a wrong or false result. 

However, it’s important to know that you should always consult with a mortgage advisor or bank before making any commitments. 

Sure, you can use affordability calculators to figure out what you can and can’t afford, but we wouldn’t recommend using that information as the basis for your financial planning. 

It helps you be more prepared by giving you a base idea of your financial possibilities and encourages you to use that result as a reference number rather than a blueprint.