What are Option Fee & In-Principle Approval?
Purchasing a property involves numerous paperwork and many fees (option fees, down payment, application fees, insurances, stamp duty, legal fees, etc.) to be paid.
Regardless of how many documents you need to prepare and how many fees you need to pay, two of the more important ones are Option to Purchase (OT) and In-Principle Approval (IPA). These are crucial to ensure that the property will not be sold to someone else and to prevent you from losing your option fees.
What is an Option to Purchase?
An Option to Purchase (OTP) is a fee to be paid before the actual property purchase. This confirms that the buyer is certain in purchasing the property and will not back out at the last minute. The option fees depend on the value of the property and it ranges from 1% to 5%; 1% for private resale properties and 5% for new properties.
Can I Backout on the Property Purchase?
Yes, you can choose to not get the property after paying the option fees. However, the option fees are not refundable or partially forfeited.
Resale unit – 1% deposit, full 1% will be forfeited
New launch – 5% deposit, 25% of 5% will be forfeited.
(example $60,000 deposit, forfeit $15,000)
Common reasons as to why buyers have to forfeit the option fees are – inability to make the down payment, financial institute is not willing to loan the amount needed for monthly repayment, and/or the buyer did not think through the property purchase thoroughly.
Down payment comes up to 25% of the property’s price. For buyers taking on a bank loan, be it a private or non-private property, a down payment of 25% has to be made (at least 5% has to be paid using cash).
Price of property: $700,000
Down payment = $175,000 (25% x $700,000)
Amount of down payment to be paid in cash = $35,000
As for the loan which needs to be taken up to make the monthly repayments, it can be easily secured with an In-Principle Approval.
What is In-Principle Approval?
Ideally, the buyer should get an In-Principle Approval (IPA) from the bank before paying the option fees. It is an agreement between the borrower and the bank to loan a certain sum to the borrower. In the IPA, the loan amount and validity of the IPA will be clearly stated. With it, buyers will not have to worry about forfeiting their option fees in the event where the bank decides not to loan the amount. In the event where interest rates are lowered than the one stated in the IPA, it is possible to take on a loan from another bank or let the IPA lapse.
Before the bank agrees to loan you the amount, they will look at your credit history, salary, debts on hand, age, and so on. Total Debt Servicing Ratio 1(TDSR) and Mortgage Servicing Ratio 2(MSR) also have a limit of 60% and 30% respectively.
1TDSR: A ratio used to calculate your gross monthly income and monthly debt obligations (i.e. student loans, credit card loans, car loans, property loans, renovation loans). The maximum debt obligations on hand have to be below 60% of the gross monthly income.
2MSR: MSR only applies to loans that will be paid for HDB or Executive Condominium purchases, and it has to be bought directly from a developer. Under MSR, property loans should only take up 30% of the gross monthly income.
Why is an IPA Important?
Getting an IPA does not mean that you are taking on a loan. Instead, it gives you the assurance that the bank will give you the loan should you confirm that you are getting the property. Not only that, it can also help you to better manage your finances as you know how much loan you are getting.
For instance, the bank is willing to loan you $1 million, and gives you an IPA which is valid for 7 days (Base on today). You also have $100,000 cash on hand and $70,000 in CPF Ordinary Account. Adding up the amount that the bank is willing to loan and the amount you have, you will be able to gauge the range of property you can afford (in this case, it is $1.17 million. Now that you have the numbers, you can search for a property that is within your budget efficiently.
Where can I get an IPA?
In-Principle Approvals can be secured via the financial institutes in Singapore. An example would be DBS. With the correct documents in place, the bank will be able to provide an IPA within a working day or two.
Another feature of DBS is MyHome planning tool. Users can easily work out their budget using property price, monthly instalment, down payment, or maximum loan amount. Details (age, monthly income, debts on hand, etc.) of the user have to be imputed before the report will be generated. DBS digibank users are recommended to login to their account to save the property budget and to get a more detailed report.
In the report, it will generate the value of property which you (and your partner) can afford, maximum loan amount (according to Loan-to-Value limit), and the amount of down payment required. Monthly repayment, which allows you to choose the loan period, can also be calculated using the calculator at the end of the report.
An In-Principle Approval provides many benefits – assurance that you will get the loan, better management of budget, and ability to secure a rate with the bank (IPA can be lapsed if the market’s interest rates are lowered). Property buyers can also prevent their option fees from being forfeited. In addition, IPA is not a commitment to take on the loan; it only acts as a guarantee that the bank will loan the amount.
With such advantages, buyers should definitely get an IPA from a financial institute before searching for a property.
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Ideal Home is well-liked by both local and international clients for their friendly yet professional approach in the way it goes about helping them with their real estate goals in Singapore. They welcome the opportunity to have a no-obligation chat with you to see how they can help you to achieve your real estate goals in Singapore.
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