Guide to Building Under Construction (BUC) Loans in Singapore
What is a Building Under Construction (BUC) Loan?
A BUC (Building Under Construction) loan is a specific type of home financing in Singapore designed to support the purchase of properties that are still being built.
Its primary purpose is to help buyers secure their dream homes without having to wait for the construction to be completed. This type of loan is popular in Singapore, where many residential developments are sold before they are fully built. By offering a BUC loan, lenders provide a financing solution that matches the phased nature of the construction process, thereby minimising financial strain on the buyer.
A key aspect of a BUC loan is that it often comes with lower initial monthly instalments as the loan will be disbursed partially at different stages as the construction progresses. This can make it an attractive option for those looking to manage their finances effectively while investing in a new property. However, it’s important to note that these loans will be on a more volatile floating interest rate during the construction period, which may increase the overall cost of borrowing depending on market conditions.
Understanding Building Under Construction Home Loans
Building under construction home loans in Singapore operate under a progressive payment scheme, where the loan amount is disbursed in stages corresponding to the completion milestones of the property. This structure provides a practical financing solution for both developers and buyers, making it easier for developers to manage their cash flow while providing buyers with a structured payment plan.
The progressive payment scheme typically includes several key stages:
Foundation
5% of the loan is released when the foundation is completed.
Reinforced concrete work:
10% of the loan is released as the structural framework of the building is erected.
Partition walls
5% of the loan is released when partition walls are erected.
Roofing
5% of the loan is released when roofing is completed.
Door sub-frames/frames, window frames, electrical wire (without fittings), internal plastering, plumbing
5% of the loan is released when interior works are completed.
Car parks, roads, drains serving the housing project
5% of the loan is released when amenities are completed.
Building; roads, drainage, sewage works; water connection, and electricity and gas supplies
25% of the loan is disbursed when utilities are completed. At this point, the Temporary
Final Payment Date/Completion
The final 15% of the loan is disbursed upon the completion and inspection of the property.
This staged disbursement ensures that the funds are used appropriately for the construction phases, reducing the financial risk for both lenders and borrowers. Additionally, during the construction period, borrowers often benefit from lower monthly instalments due to the loan being disbursed in parts, which can help manage cash flow more effectively until the property is fully built and ready for occupation.
Types of Building Under Construction (BUC) Loans
In Singapore, there are primarily two types of building under construction loans available to cater to different financial needs and preferences.
Fixed rate package
Very rarely do banks actually offer fixed rates for building under construction loans. A fixed rate package for building under construction loan offers the advantage of stable interest rates for the first two to three years the construction period. This means that the interest rate remains constant, providing borrowers with predictable monthly payments. This option is particularly beneficial for those who prefer certainty in their financial planning and wish to avoid the fluctuations associated with variable rates. However, fixed-rate packages will also come with their own set of risks if the market were to enter a downtrend, preventing the borrower from enjoying lower interest rates.
Variable (floating) rate package
A variable rate package, also known as a floating rate package, has interest rates that can fluctuate based on market conditions. The rates are usually pegged to a benchmark rate, such as the Singapore Overnight Rate Average (SORA). This type of building under construction loan can be advantageous if market interest rates are expected to decrease, potentially lowering your monthly payments over time. However, the downside is the uncertainty of rate changes, which can increase your repayment amounts if market rates rise.
What is the Benefit of a BUC Loan?
Opting for a home loan for under construction property comes with several benefits that can make it an attractive option for buyers.
Lower Initial Monthly Instalments:
One of the significant benefits of loans for BUC properties is the lower initial monthly instalments. As the uncompleted property follows a progressive payment scheme, the monthly instalment is only based on the disbursed loan amount.
Lesser Interest Paid During Construction
When an uncompleted property is under construction, banks will only charge interest on the disbursed amount of the Building-Under Construction (BUC) loan based on the progressive payment scheme set by developers. Hence, the impact on consumers will be less tedious in high-interest-rate environments as not the full loan is disbursed while the property is still in the construction phase. This is unlike a home loan for a completed property, where the full loan will be disbursed on the completion date.
Flexible Repayment Options
Many Building Under Construction loans offer flexible repayment schedules, allowing borrowers to make partial repayments without penalty on the disbursed loan amount. This flexibility can help consumers reduce the interest payable to the banks.
What are the risks of a BUC Loan?
While there are notable benefits to taking out a BUC loan, there are also some disadvantages associated with under construction property home loans that potential buyers should consider.
Fluctuating Interest Rates
One of the primary risks associated with construction loans is the potential for fluctuating interest rates. Most banks offer only floating rates while the property is under construction, allowing borrowers to switch to a fixed rate only once the property attains a Temporary Occupation Permit (TOP). Prudent financial planning is essential to budget properly for monthly instalments. For example, many buyers who took out a Building Under Construction loan during the COVID-19 period enjoyed low interest rates. However, not all were prepared for the subsequent spike in interest rates, which significantly increased their monthly instalments.
Long Completion
Unlike a home loan for a completed property, where the full loan is disbursed upon the completion date, Building Under Construction loans follow the progressive payment scheme set by developers. This scheme introduces more potential variables, such as fluctuations in interest rates. It is advisable to select a reputable law firm to manage the loan disbursement over the several years it takes for your development to reach completion.
Poor Repricing Options
All banks impose a cancellation fee ranging from 0.75% to 1.50% on the undisbursed loan amount if the borrower chooses to refinance with another bank. Since the full loan is only disbursed upon the development achieving Certificate of Statutory Completion (CSC) status, banks understand that the probability of borrowers refinancing elsewhere is low due to these additional costs. Consequently, while borrowers can reprice their existing mortgage loan to a new package within the same bank at any time, there is a risk that their current bank may offer a rate higher than the market rate.
What to Consider Before Going for an Under Construction Property Home Loan
Before committing to a home loan for under construction property, it’s crucial to consider several factors to ensure it aligns with your financial situation and goals.
Project delays
Construction projects can face unexpected delays due to various factors, such as labour shortages, supply chain disruptions, or regulatory issues. It’s important to prepare for potential delays and understand how they could impact your loan disbursement and overall financial planning.
Finished property might not meet expectations
The completed property may not always match the initial plans or your expectations. Changes in design, materials, or finishes during construction can affect the final outcome. Maintaining communication with the developer can help manage these risks.
Unpredictable rental yields
If you plan to rent out the property upon completion, be aware that rental yields can be unpredictable. Market conditions at the time of completion may not guarantee the rental income you initially projected. It’s important to conduct thorough market research and have a realistic expectation of rental returns.
Mortgage loan packages
Carefully compare different mortgage loan packages offered by banks and financial institutions. Consider factors such as interest rates, loan tenure, repayment flexibility, and additional fees. Choosing the right mortgage package can significantly impact your financial stability and overall cost of borrowing.
Resale market for properties under construction
The resale market for under-construction properties can operate differently compared to completed properties. Assess the demand and market conditions for such properties to understand the potential challenges and opportunities in selling the property in the future.
Research the developer's reputation and track record
The developer’s reputation and track record are crucial in ensuring the project’s timely and successful completion. Research previous projects by the developer, read reviews, and consider their financial stability before making a decision.
How does the BUC Loan Application Process Go?
Before opting for a bridging loan in Singapore, several critical factors need to be considered to ensure it aligns with your financial situation and goals.
1. Securing an IPA home loan from a bank: Begin by securing an In-Principle-Approval (IPA) from a bank. This pre-approval indicates the maximum loan amount you are eligible for, based on your financial situation. Having an IPA can give you a peace of mind before committing to a purchase.
2. Explore show flats and consider the price: Visit show flats and evaluate the property’s price and features. Consider factors such as location, amenities, and future resale value.
3. Make a 5% booking fee: If you are satisfied with the property, make a 5% booking fee to secure your unit. 25% of this fee is typically non-refundable and counts towards the down payment.
4. Research bank loans: While waiting for the Sales and Purchase (S&P) agreement, research different bank loans to find the best terms and interest rates. Compare offers from various banks to make an informed decision
How does the Progressive Payment Scheme (PPS) Work?
The progressive payment scheme (PPS) is a structured payment plan used for building under construction home loans in Singapore. It allows buyers to make payments in stages, corresponding to the completion milestones of the property. This scheme helps manage cash flow effectively and reduces the financial burden on buyers.
The process begins with an initial down payment of the OTP, which is 5% of the purchase price. You will also have to sign the Sale & Purchase agreement (S&P) and pay the remaining 15% down payment. CPF funds can be used for this 15% as well as any remaining stamp duties, offering greater flexibility in your capital.
Subsequent payments of your loan will then be made as the construction progresses through various stages:
- Foundation completion: 10% of the purchase price.
- Framework completion: 10% of the purchase price.
- Roofing and enclosure: 10% of the purchase price (5% each for partitions and walls, and ceilings)
- Interior plumbing, plastering, framing, and electrical wiring: 5% of the purchase price
- Exterior fixtures (e.g. roads, drains, car parks): 5% of the purchase price
- Temporary Occupation Permit (TOP) issuance/receipt: 25% of the purchase price.
- Final Completion: 15% or the remaining balance of the purchase price, which is paid upon issuance of the Certificate of Statutory Completion (CSC).
This staged payment process ensures that buyers do not have to pay a large sum upfront and can manage their finances more effectively over the construction period. It also aligns with the developer’s need for a steady cash flow to fund the construction process.
BUC Loan VS Traditional Home Loan
When comparing a building under construction loan to a traditional home loan, several key differences emerge, each with its own advantages and considerations:
When comparing a building under construction loan to a traditional home loan, several key differences emerge.
Advantages of building under construction loans include:
- No Lock-In Period: One of the main benefits of a BUC loan is that most packages do not come with any lock-in period. In this case, any loan amount that has been disbursed by the bank can be paid off without incurring any penalty fees. This is useful during times of high interest rates, borrowers will have the option to reduce their expose by paying off any disbursed loan amount.
- Progressive payment scheme: The progressive payment scheme (PPS) associated with BUC loans allows for easier cash flow management. Payments are made in stages, aligned with the construction milestones, reducing the immediate financial burden on buyers.
- Interest paid on disbursed loan amount: During the stages of construction, BUC loans may charge interest only on the disbursed loan amount as per progressive payment scheme. This means that buyers only pay the interest on the loan amount disbursed, which can lower the monthly repayment burden until the property is completed.
While traditional home loans will enjoy benefits such as:
- Shorter Completion: Traditional private home loans have lesser variance to consider since the loan amount is disbursed in full at the time of purchase completion.
- Fixed Rates are available: Completed properties financed with traditional home loans have access to fixed rates. This can provide more stability when it comes to monthly instalments, properties under construction on the other hand, will only be able to switch to a fixed rate once their project attains Temporary Occupancy Permit (TOP).
Pointers regarding a Building Under Construction Home Loan Application
Securing a home loan for under construction property can be competitive. Here are some tips to enhance your chances of approval:
Optimise your credit score
A good credit score is crucial for loan approval. Ensure your credit report is accurate and free from errors. Pay off any outstanding debts and avoid taking on new
Reduce existing debt
Lowering your existing debt levels can improve your Total-Debt-To-Servicing (TDSR) ratio, enabling you to secure a higher quantum for a building under construction loan. Pay down credit card balances, personal loans, and other debts as required.
Consider Pledging or Showing of funds if there is a shortfall loan amount
If the loan is insufficient for your property purchase, you may consider to pledge some funds with the banks (for four years or period of stay with bank, whichever is shorter) or show some funds to the banks twice (first time upon application, second time upon loan disbursement).
Get an In-Principle-Approval (IPA) before committing to a purchase
Securing an IPA from a lender will give you a peace of mind. It demonstrates your ability to finance the purchase and speeds up the actual loan application process when you actually purchase.
Consult a mortgage broker
Mortgage brokers have extensive knowledge of the lending market and can help you find the best loan options. They can also assist in preparing your application to increase your chances of approval.
What Our Customers Say
Find out what The Loan Connection’s clients are saying about our home loan for under construction property consultation services.
How to Get Started with Us
Getting started with a home loan for under construction property with The Loan Connection is straightforward:
Contact us
Reach out to our team via our website or call us directly.
Consultation
Schedule a consultation with one of our experienced mortgage advisors.
Compare options
Our advisors will help you compare various BUC loan packages from different banks.
Document preparation
Gather the necessary documents with our guidance.
Application submission
We assist you in submitting your loan application and follow up regularly.
Finalisation
Once approved, we help you finalise the loan process, ensuring a smooth transition.
Why Choose TLC for Home Loans for Under Construction Property?
Choosing The Loan Connection for your under construction home loan needs means partnering with a dedicated and experienced team committed to your financial success.
We offer a comprehensive suite of mortgage advisory services, providing a one-stop solution for all your BUC financing needs. From initial consultation to final loan approval, we are with you every step of the way.
Our services include detailed financial assessments, loan comparisons, house loan refinancing, and personalised advice tailored to your unique circumstances. Through our meticulous efforts, we ensure you get the best loan terms and rates available so you can balance your financial goals against your short-term and long-term life goals.
Frequently Asked Questions About Building Under Construction Loans
Choosing a BUC property can offer potential capital appreciation, lower monthly instalments, and the furnishing and fittings will be brand new.
Risks of BUC properties include construction delays, potential changes in property value, and differences between promised and delivered specifications. Mitigate these by choosing reputable developers, understanding the contract terms, and having a contingency plan.
The PPS for BUC loans involves making payments in stages as the property construction progresses. Payments are aligned with specific construction milestones, reducing the initial financial burden on the buyer.
No, the building under construction loan amount is disbursed progressively based on the construction milestones. This ensures that funds are used specifically for the construction stages.
Yes, aside from the first 5% booking fee, CPF savings can be used to pay for the initial down payment and subsequent payments of building under construction property loans as per the CPF rules and regulations.
Yes, applying for building under construction loans with multiple banks allows you to compare interest rates, terms, and conditions to choose the best offer.
Yes, refinancing your building under construction loan is possible if you find better interest rates or loan terms from another lender. However, do take note that banks will charge a cancellation fee on the undisbursed loan amount, consult a mortgage broker to assess whether it is worthwhile to do so.
Yes, the developer must adhere to a stipulated construction timeline as outlined in the sales agreement. Delays beyond this timeframe can result in penalties or compensation for the buyer.
Early repayments of building under construction loans are generally allowed, but they may incur penalties depending on the loan terms. It’s important to check with your lender for specific conditions.
Yes, first-time homebuyers can apply for building under construction loans, provided they meet the eligibility criteria set by the lender.
Building under construction loans are typically used for residential properties, but some lenders may offer similar financing options for commercial properties under construction.
Yes, building under construction loans can be used for properties purchased under joint tenancy or tenancy-in-common, provided all parties meet the lender’s criteria.
Yes, building under construction loans can be used for properties that are partially completed, with the loan disbursed according to the remaining construction milestones.
Yes, the LTV ratio for building under construction loans typically follows regulatory guidelines, which may vary depending on the property type and borrower’s financial profile. It’s essential to check with the lender for specific LTV limits.