Know what the bank will lend before you buy: the in-principle approval

Most buyers start viewing with a number in their head: what they think they can borrow, worked out from what they earn. The bank works it out differently, and the two figures are often further apart than people expect. An in-principle approval is how you find out which number is right while it is still cheap to be wrong.

What an in-principle approval is

When you apply, the bank looks at you rather than at a property: your income, the loans and card balances you already carry, your age, and your credit report. From those it works out the largest loan it would be prepared to make you, and tells you. Some banks call it an approval in principle (AIP). It is the same thing.

It is not a loan. Nothing is signed, no money moves, and you are not tied to that bank. It is the bank’s answer to one question: if you found a property tomorrow, how much would we lend you?

Why get one before you sign anything

Buying a resale private property starts with an option to purchase (OTP): you pay the seller an option fee to hold the property for you while you decide. A new launch starts the same way, with a booking fee to the developer. Once that money is down, the clock is running. If the loan turns out smaller than you were counting on, you either find the difference in cash, or walk away and lose the option fee — on a new launch, part of the booking fee.

An IPA moves that discovery to before any money is down. It settles two things.

• Whether the bank will lend what you are counting on. The bank does not lend against your total pay. It counts only 70% of bonus, commission and rental income, and it tests the monthly instalment at 4% a year rather than the rate you will actually pay. For a household with a large bonus, the gap can run to six figures.
• Whether your credit report is what you think it is. The bank checks your credit report — the credit bureau’s record of your loans, cards and repayments. People who are sure their record is clean are sometimes surprised by what is on it, and the bureau itself might make mistakes. Either way, it takes time to set things right. You have that time before an OTP. You do not have it after one.

What it will not tell you

An IPA answers the questions about you. It cannot answer the ones about the property, because there is no property yet.

• The valuation. The bank lends a share of the price or of its own valuation, whichever is lower — up to 75% on a first home loan. So an IPA for $1m does not mean you can borrow $1m. Buy at $900,000 and the most a 75% loan can be is $675,000; if the bank then values the unit at $850,000, the loan drops to $637,500, and the $37,500 difference comes out of your own cash. Only the bank’s valuation of the actual unit settles this.
• The property itself. Some banks lend less, or not at all, against particular properties — a conservation house, for example. A short remaining lease can also limit how long the loan can run, and a shorter loan is a smaller one.
• The final answer. The full application is assessed afresh, on your latest documents. A new car loan, a change of job or a smaller bonus in between can change the figure.
• Your rate. An IPA is about how much, not at what price. Packages change often, and the one on offer when you sign may not be the one on offer today. There is no need to choose a package until you hold an OTP or a signed sale and purchase agreement.

When to apply

Once you are seriously looking — before you start making offers, not after. An IPA is normally valid for around a month, and some banks will extend it, so there is little point getting one months ahead. If it lapses before you have found somewhere, you simply apply again.

Leave yourself some slack. It is not always same-day, and if your credit report does turn up a problem, you want weeks to sort it out, not the few days an option gives you.

How to apply, and which bank to ask

Most banks take the application online, with Singpass filling in your income and CPF records from government sources. If you are buying with someone else, apply together. The bank assesses the two of you as one household — combined income, combined debts, and an age that decides how long the loan can run — so an IPA for one of you says little about what you can borrow jointly.

Which bank you ask matters more than most people expect. MAS sets the minimum cut on variable income, but banks are free to be stricter, and they differ — especially on commission, director’s fees and income earned abroad. Two banks can give the same person noticeably different figures. If most of your pay is a fixed salary, it matters less. If it is not, it is worth asking before you apply.

Sources. The 70% income recognition, the 4% medium-term interest rate and the 55% debt ceiling behind them are set by the Monetary Authority of Singapore under MAS Notice 645 — see MAS’s explainer on calculating TDSR for property loans. Loan-to-value limits are also set by MAS; 75% is the limit on a first housing loan within the tenure and age limits. Option and booking fees are described in general terms; the terms of your own option or booking form govern. Each bank applies its own credit policy on top of these rules, and an in-principle approval is not a commitment to lend.