A Mountain of Debt

19 Oct 2017 

​By Soh Chin Heng


Mr Soh Chin Heng, or CH as he is commonly called by friends, is the Deputy Chief Executive (Services) of the Central Provident Fund Board Singapore. He is a non-practising certified financial planner, and gives regular talks on CPF and financial security.


I had a "lim kopi" session with a colleague Ah Woo last week. Ah Woo recounted to me his experience buying his first property 24 years ago. He started working for less than a year, and was planning to marry his sweetheart Ah Choo in a few months' time. In typical Singaporean style, his marriage proposal to Ah Choo was, "Shall we buy a HDB flat?"


This tried-and-tested approach worked.


That was the easy part. The more difficult part - in those days - was to buy the flat. Ah Woo and Ah Choo did not have much savings, nor parents who would help chip in. In 1993, buying a new flat from HDB was based on a queueing system, which differs from the current BTO balloting system. The waiting time was long, around 5 years. The couple did not want to wait that long, and a resale HDB flat was the only viable option.


However, the property market was on a super bull run, which was bad news for buyers like Ah Woo and Ah Choo. Ah Woo's heart sank when he discovered that resale flat prices went up 10-12% in each quarter. He was in a dilemma - what should he do?


Unlike most of their peers who bought 5- or at least 4-room flats as their first home, Ah Woo and Ah Choo settled on a 3-room flat in Woodlands. They reasoned that having two bedrooms was sufficient for them, since they planned to live by themselves. The only problem was the "face" factor, and they consciously decided to ignore what others might say. 


There was also the big issue of the housing loan. In the past, the recommended guideline was to keep one's housing repayment to within 40% of one's income (today it is at 30%), and this was called the Mortgage Servicing Ratio (MSR). However, 40% was a challenge to the couple, who felt that it was too high and did not allow them to spend money on other things.


Fortunately, Ah Woo happened to have a casual chat with his big boss then, who advised him that he should not go beyond 25%. This sounded much more prudent to Ah Woo and Ah Choo. They emptied their savings, took up a small loan with a MSR below 25%, and paid off the loan in five years. They never regretted their decision as it gave them peace of mind knowing that they do not have a housing debt. They could also channel their finances towards growing their wealth.


Besides housing loan, there are other liabilities we may have to incur from time to time - education loan, renovation loan, credit card payments, etc. These debts will also limit the amount you can borrow for a mortgage loan.


Besides the MSR, you'd have to factor in the Total Debt Servicing Ratio (TDSR) when calculating your loan obligations. The TDSR is a measurement of your total monthly debt obligations against your total monthly income. By law, it must not exceed 60%.


Here's an example on how the TDSR and MSR will affect your home loan:

A Mountain of Debt.png 


Recently, *RICE Media interviewed Mr Robert Wong, who shared a sobering tale of how he went from riches to rags during the 1997 financial crisis. Mr Wong was a successful businessman who seemingly had it all – a landed property, a high-end car, and an abundance of other material possessions. But all these came to naught when circumstances change and he found himself riddled in bad debts.


Just as the power of compounding works in your favour if you have assets that earn returns over a long period of time, it works against you if you incur liabilities - especially if the interest rate is high and the loan tenure is long.


How you navigate your mountain of debt would have a big bearing on your pursuit of financial security. Hopefully, yours would be a molehill rather than a mountain. Make sure you take into consideration all your liabilities and plan your finances carefully to prevent getting overwhelmed by debt. And remember these two guidelines :


Mortgage Servicing Ratio < 30%

Total Debt Servicing Ratio < 60%


This article is part of a series by Mr Soh, who will be sharing tips on how you can chart your way towards financial security. Read more:

The Most Important Financial Question

Your Financial Security Compass

Your Lifetime Financial Partner

Albert Einstein and Warren Buffet

My 3 Generational Story


*RICE Media is an online publication that brings fresh perspectives and bold commentary on everyday life in Asia.

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