It is about four months since the new measures to standardize banks’ debt service calculation when granting property loans were introduced on 29 Jun 2013.
To recap, the 2 debt service calculations are:-
(1) Total Debt Servicing Ratio (TDSR) < 60%
Total monthly payments on all loan payments including new property loan must not exceed 60% of total gross income
(2) Mortgage Service Ratio (MSR) < 30% (applicable to HDB loan only)
Total monthly payment on HDB loan must not exceed 30% of total gross income
It is evident that during the past few months, the new debt servicing policy has affected certain groups of property buyers/owners more than others. Let’s look at the ‘after-effects’ felt by the affected groups:
Group 1 – Investors choosing to pay off existing property loan before investing in another property so that only the new property loan is included in the debt servicing calculation and to qualify for maximum loan quantum.
Group 2 - Property owners looking to refinance their current home loan packages for lower interest rates may find it difficult to do so if they come under the following scenarios:
(a) current income of borrowers are not able to meet the debt service calculation, leading to lower amount of loan approved, leading to borrowers having to top up the difference in cash/CPF.
(b) current loan period of the home loan to be refinanced has exceeded the maximum loan tenor allowed under new measures. If they were to refinance, they will be granted shorter loan tenor, which means borrower is required to come up with more each month for mortgage payment.
(c) current property loan was previously granted based on asset under management, would have to show more deposits balance or liquid assets or pledge their liquid assets due to the new measures requiring banks to take a haircut of 30% on the value of pledged assets or 70% on the value of unpledged assets.
In the above circumstances, some of the property owners may not be able to refinance their current home loans and would have to continue with the loan paying the higher rate.
Group 3 – Change in ownership structure from joint ownership to single ownership arising from divorce or part purchase & sale transactions.
In such cases, under the new tightened lending measures, the remaining owner and borrower with single income might not be able to obtain approval for loan amount sufficient to finance the ‘takeover’ of the property and the outstanding loan.
What are some of the financial adjustments made by property buyers/investors?
As a result of the new measures, property buyers who are determined to make their purchase, have instead made adjustments to their financial plans:
- Property buyers lower their budget by going for smaller units;
- There are some who initiated to clear their HDB loan, car loans or other personal bank loans or cancel credit cards before applying for property loan, in order to qualify for higher loan quantum.
- Those who are approved with lower loan amount, choose to top up with more cash/ CPF.
- Many opt for EC instead of private condominium as the existing property loan is not required to be included in TDSR calculation.
- Some buyers, who have previously considered HDB flat but are affected by MSR guideline, are going for private properties instead. This is illustrated in the following example.
Example: Buying private property allow you to get higher loan amount compared to buying HDB flat
Couple A, planning to buy their first property, is considering whether to buy a resale HDB or private property.
The couple is both aged 35 years with combined income of $5,000 per month, which is fixed basis. They do not have other loan commitments. Scenario A:- Buying a resale HDB flat
Based on MSR of 30% of $5,000, the monthly payment on property loan must not exceed $1,500.
At interest rate of 3.5% (required by MAS) and over 25 year loan period (maximum allowed for HDB loan), the loan amount is about $300,000.
As this is their first property, they would qualify for 80% loan. Based on the loan of $300,000, the value of the property should not be more than $375,000.Scenario B:- Buying a resale private property
Based on TDSR of 60% of $5,000, the monthly payment on all loan payment must not exceed $3,000.
As the couple does not have any other loan commitment, therefore the $3,000 can be taken as solely for housing loan payment.
At interest rate of 3.5% (required by MAS) and over 30 year loan period (maximum allowed), the maximum loan amount is about $660,000.
At 80% financing, the value of the property works out to be $825,000.
From the above example, it is possible for property buyers to obtain higher housing loan amount when buying a private property compared to buying a HDB flat.
What can borrowers do to ease their home loan / refinancing application?
- Check your TSDR and/or MSR and assess what is the maximum loan amount you would qualify.
- Keep the latest loan and credit card statements.
- If required, clear some personal loans or cancel excess credit cards before applying for property loan
- Lastly, apply for Approval-In Principle with banks before making the purchase.