You’ve just gotten your dream job as an analyst in one of the world’s bustling financial centres, ready to take the investment banking industry by storm. Now what? If you’re looking to put down roots and set the foundation for long term stability, you may be considering purchasing your first house.
IB Insider compares the details on first time mortgages across London, New York, Hong Kong, and Singapore.
Before we begin, there are a few technical terms to be aware of: the Loan to Value (LTV) Ratio refers to the loan amount as a percentage of the property’s value. For example, if an individual borrows $300,000 to purchase a property valued at $400,000, the LTV ratio is 75%.
The Debt Servicing Ratio (DSR) refers to the portion of a borrower’s gross monthly income that goes towards repaying debt obligations. For example, if an individual pays $5000 a month to debt repayment on a $50,000 gross monthly salary, their DSR is 10%.
If this debt is entirely comprised of mortgage payments, it can also be referred to as the Mortgage Servicing Ratio (MSR).
You will also have the option of choosing between a fixed-rate mortgage, and an adjustable-rate mortgage (ARM). A fixed-rate mortgage is one in which the interest rates you are charged remain fixed over the specified time period of the mortgage; for example, a two-year fixed-rate mortgage will see fixed interest rates for the first two years, where rates beyond that are determined by the lender.
An adjustable-rate mortgage will see changing interest rates throughout the life of the loan, which tend to move in line with the economy.
Unfortunately, there is just no getting around it – buying a house in London is expensive. While there are no governmental limits on LTV ratios or your DSR, the current average LTV ratio for owner-occupier mortgages in the UK is roughly 86%. This means that the average down payment you can expect to pay is around 14% of your property’s value, too low to unlock the lower interest rates that a 75% LTV ratio can.
The average MSR in London hovers around 47% as of 2019, mostly driven by house price increases.
There is some relief though; first-time home buyers that purchase property valued at £500,000 (roughly USD$676,000, or €552,000) or less are exempted from Stamp Duty Land Tax from 1 April 2021.
Stamp Duty is a purchase tax levied on single property purchases, charged as a percentage of the property value. You’ll also be eligible for this discount if you bought your first home before 8 July 2020.
In the UK, long-term fixed-rate mortgages have been rare since the 2008 financial crisis, due to risk-adverse lenders. Thus, you’re more likely to see fixed-rate mortgages with time periods of two, five, and ten years.
Between 2014 and 2020, the average rate for a two-year fixed-rate mortgage in the UK was 1.59%, and the average rate for a two-year variable mortgage was 1.68%.
New York City
The magic LTV ratio for most lenders in the US is 80%, as making a down payment above 20% of the property’s value will exempt you from paying for private mortgage insurance.
Fortunately, permanent residents with green cards and non-permanent residents with valid work visas can get access to loans which offer LTV ratios of up to 97%. One example is the Conventional 97 loan offered by Fannie Mae, which will give you fixed-rate mortgages with a maximum term of 30 years on only a 3% down payment.
While the US does not have Stamp Duty Tax, New York City does charge a Mortgage Recording Tax, requiring you to pay 1.8% on mortgage amounts under US$500,000 (roughly £370,000, or €410,000) and 1.925% on mortgage amounts above US$500,000.
Unlike the UK, the US continues to offer long-term fixed-rate mortgages with time periods ranging from ten to thirty years. As of December 2020, the average rate for a ten-year fixed-rate mortgage in New York was 2.75%, and the average rate for a three-year ARM was 4.5%.
Differing from the two cities above, Hong Kong sets the limit on the LTV ratio for mortgages at 60% for properties valued under HK$10 million (roughly £953,000, €1,053,000 or USD$1,290,000), on top of a loan cap of HK$5 million. The Hong Kong Monetary Authority has also capped the maximum DSR you can incur at 50%.
However, it is still possible to get mortgage loans with an LTV ratio of up 90% if you are a first-time home buyer.
Under the Mortgage Insurance Programme (MIP) launched by the Hong Kong Mortgage Corporation (HKMC), banks can offer first-time home buyers drawing a regular salary (you!) mortgage loans with higher LTV ratios without incurring additional credit risk.
You can get an LTV of 80% on properties worth as much as HK$10 million, and 90% on properties worth as much as HK$8 million (roughly £773,000, €845,000 or USD$1,030,000).
The average interest rate of mortgage loans in Hong Kong as of June 2020 was 2.59%, and the HKMC has introduced a fixed-rate mortgage pilot scheme where you can get a ten-year fixed-rate mortgage at 2.75%, and a twenty-year fixed-rate mortgage at 2.95%.
You should also note that all first-time home buyers are subject to Stamp Duty dependent on the value of your property, and all non-permanent residents must pay an additional Buyers Stamp Duty of a flat rate of 15%.
Selling your property within 36 months of acquiring it will also subject you to Special Stamp Duty, a tax calculated at different rates dependent on how long you held the property.
Getting a mortgage in Singapore as a foreigner can be tricky. Firstly, the majority of residential housing developments in Singapore are publicly owned and developed by Singapore’s Housing Development Board (HDB), and only Singaporean Citizens or Permanent Residents are eligible to buy these flats.
As such, you will be limited to buying private properties or executive condominiums, which can be rather expensive.
You should also note that roughly three quarters of the land in Singapore is state-owned, and you will likely be buying a leasehold property. Leasehold properties can only be held for a fixed amount of time; the two main leasehold types in Singapore are 999-year and 99-year leases.
On the expiry of the leasehold, the ownership of the land will revert to the state and you will not retain any property rights.
Singapore has set LTV limits at 75% for a minimum cash down payment of 5%, and 55% for a minimum cash down payment of 10%. This cap applies to housing loans for the purchase of an HDB flat, or an executive condominium bought directly from a developer, the latter of which you’re most likely to be buying.
The Monetary Authority of Singapore also caps your MSR at 30%, and your total DSR, including non-mortgage debt repayments, at 60%. You should also be prepared to pay Buyer’s Stamp Duty as a first-time home buyer regardless of your residential status, and Additional BSD if you are not a Singaporean citizen.
The average interest rate of home loans in Singapore was around 2.2% at the beginning of 2020. For a more recent estimate, you can find better deals by shopping around – for example, you can get a fixed-rate mortgage with interest rates ranging from 1.25% to 2.0% for financing private property purchases.
Good news: there are no restrictions on foreigners purchasing real estate in Germany, and the maximum amount banks are willing to lend you is higher if you are a resident – work visas included! While there are no official caps on LTV ratios for your mortgage, most lenders will be very cautious in offering a mortgage LTV ratio of more than 80%.
German banks also assess your ability to afford your mortgage via your existing savings and your disposable income – it is uncommon for them to grant you your loan if your expected MSR is above 35 to 40%.
Beware additional costs though; in Frankfurt, you could pay up to a maximum of 13.95% of the value of your property in purchase costs, the summation of notary fees, property transfer tax, and real estate commission.
These costs are unlikely to be covered by your mortgage, meaning that you will have to either finance these costs out of pocket, or with a KfW homeownership loan.
This loan, offered by the government-owned development bank KfW, allows you to borrow up to €50,000 (roughly £45,000 or USD$61,000) at interest rates below 1% for financing home purchase costs.
The most popular form of mortgages in Germany is the fixed-rate mortgage, with time periods of five to up to thirty years. As of October 2020, the average interest rate of mortgages in Germany was 1.2%, with monthly averages for the year never exceeding 1.5%.
The costs involved in mortgages can be daunting, but don’t let this put you off from the stability of owning your first home. There do exist cheaper housing options if you’re willing to travel more to work, such as these condominiums in Singapore, or these areas in London.
Finally, always do your research thoroughly; not all mortgage plans may be best for you. Mortgage agency Freddie Mac recently reported that buyers can save at least US$3,000 over the life of their loan by calling five lenders instead of one, so happy shopping!