Affordability is one of the biggest concerns that HDB flat buyers in Singapore have. Million-dollar HDB flat transactions that were once newsworthy are now being accepted as some sort of normality.
As our income increases, we are able to pay more for our housing needs. This naturally allows us to buy bigger homes or those in more convenient locations, which come with a higher price tag.
The current low interest rate environment and rising property market have also been a draw factor for many flat buyers. The allure of making big potential returns from property using cheap home loans may cause some to take bigger mortgages than they should.
Which leads us to ask whether we should base our affordability on the maximum amount of money that we can borrow.
Maybe not, if we use the 3-3-5 rule. This rule is a prudent approach to calculating housing affordability and is covered extensively by property blogger, Vina Ip (aka Property Soul).
First, what is the 3-3-5 rule about?
The 3-3-5 Rule
The 3-3-5 rule has three conditions that you, as a flat buyer, must fulfill to determine the affordability of the home you intend to buy.
Pay 30% Of The Property Price
The first condition is to have sufficient cash or CPF balance to pay at least 30% of the purchase price of the HDB flat. This amount would cover the downpayment, legal fees, and other related miscellaneous expenses.
Currently, borrowers need to place at least a 25% downpayment if they were to finance their HDB flat using a bank loan. Whereas the downpayment required for a concessionary HDB loan can be as low as 15% of the purchase price or value (whichever is lower) of the flat.
According to the 3-3-5 rule, borrowers might be overextending themselves if they have to take up more than 70% loan for the purchase of their property. Hence, this forms the first criteria to determine the buyer’s affordability.
For example, if a young couple’s combined cash and CPF balance is $120,000, then the maximum property value they can afford is $400,000 ($120,000/0.3).
Monthly Mortgage Servicing Of The Property Should Not Exceed 1/3 Of Your Monthly Salary
Second condition, buyers should not use more than one-third of their monthly income to service their monthly mortgage payments.
At present, the monthly mortgage servicing ratio (MSR) set by MAS for the purchase of HDB flats is capped at 30% of the borrower’s income.
This current requirement on financial institutions to ensure borrowers do not exceed the MSR supersedes the one-third condition.
For example, if the combined gross monthly income of the young couple’s salaries is $8,000, then their monthly mortgage should not exceed $2,400.
Total Purchase Price Of The Property Should Not Exceed 5x Your Annual Income
The third and last condition is that the total purchase price of the property should not exceed more than five times the buyer’s annual income.
Whether the borrower uses bank loan or HDB loan, their loan eligibility is determined by their age, income, and loan tenure. A young or high-income borrower may be allowed to borrow more than five times their annual income.
But when using the 3-3-5 rule, for example, a young couple earning a combined monthly income of $8,000 should not exceed $480,000 ($8,000 x 12 months x 5 years) for their property purchase.
Using The 3-3-5 Rule To Determine Affordability
Now that we know what the 3-3-5 rule stands for, we shall use two examples to illustrate how it is applied.
John and Sarah are in their late 20s and are going to get married this year. They are looking to buy their first house, close to Sarah’s parents. They have set aside $90,000 in cash and CPF funds to finance their property purchase and have a combined monthly income of $8,000.
Mr and Mrs Lee are in their mid-40s and are looking to upgrade to a bigger executive flat from their 4-room BTO flat. They expect to have a total of $450,000 from the sale proceeds to finance their next property purchase. Lastly, Mr and Mrs Lee have a combined monthly income of $13,000.
| Criteria | John and Sarah | Mr and Mrs Lee |
| 30% of Purchase Price | Maximum property price = $90,000/0.3 = $300,000 | Maximum property price = $450,000/0.3 = $1,500,000 |
| 1/3 Monthly Salary (or MSR of 30%) |
Maximum monthly mortgage = $8,000/0.3 = $2,400 |
Maximum monthly mortgage = $13,000/0.3 = $3,900 |
| 5 x Annual Income | Maximum property price= $8000x12x5= $480,000 |
Maximum property price= $13,000x12x5= $780,000 |
In the case of John and Sarah, they can only afford to purchase a flat for up to $300,000 due to their initial capital. Though their annual income might suggest they can afford a higher property purchase, their current capital does not support it. Young borrowers could be over leveraging themselves by taking bigger-sized and longer loan tenures in the hopes that their incomes will rise over time. However, if their circumstances deteriorate, they may find themselves saddled with a debt they cannot afford.
In the case of Mr and Mrs Lee, their ability to borrow is limited by their income. Based on their combined income, their next property purchase cannot exceed $780,000. Although their initial deposit is sizeable enough to purchase up to $1.5 million, their current monthly income does not support it.
Home upgraders or couples with more capital may have a false impression that, given their larger downpayment, their loan amount is small and manageable. This could lead them to inadvertently purchase a property that is above their income level.
From our two examples, we can see how and why flat buyers may unassumingly overstretch their budget. By taking reference from a single factor that is favourable to them, they end up borrowing more than they should.
Are New BTO Flats Expensive For First-Timers?
For most first-time homebuyers in Singapore, BTOs have been the property of choice. They are primarily viewed as an affordable option to owning a new property.
In a buoyant property market, the BTO flat prices have also risen in tandem, leading many to question the affordability level for first timers.
When Telok Blangah Beacon was launched in 2021, the 4-room flats received approximately 10 times more applications from first-timers than other BTO launches. Which is surprising, given the minimum selling price without grants started at $602,000.
Hence, we ask how many first-timers could truly afford the BTO flat in Telok Blangah Beacon (excluding any grants), if the 3-3-5 rule is applied?
To answer this, we shall use a hypothetical example.
Assumptions:
- Couple are fresh graduates who have just started working in 2018.
- They are earning the same median salary of $3,500 each, based on MOM’s starting salary with an annual increment of $100.
- They will receive a 13-month (AWS) payment each year.
- They will save 10% cash of their gross monthly income for the purchase of their first property.
- Calculations will be based on an approximate three-year accumulation of cash and CPF savings.
At the end of three years, the couple would have approximately $65,000 in their CPF Ordinary Account (OA) balance and $26,000 in cash.
Their combined monthly income in 2021 would be around $7,600. As first-timers, they may also qualify for $15,000 in enhanced CPF housing grants which is based on their income.
Next, let’s calculate the couple’s maximum affordability using the 3-3-5 rule assuming they were to use their entire OA balance, cash savings, and CPF housing grants.
| Criteria | Couple |
| 30% of Purchase Price | Maximum property price = $106,000/0.3 = $353,000 |
| 1/3 Monthly Salary (MSR 30%) |
Maximum monthly mortgage = $7,600/0.3 = $2,280 |
| 5 x Annual Income | Maximum property price= $7,600x12x5= $456,000 |
In this scenario, the maximum purchase price the couple can afford is $353,000. Hence, if they were to apply for the Telok Blangah Becon BTO, they could be overleveraging by two times.
In the same May 2021 BTO launch, first-time applicants had other relatively cheaper options in the non-mature towns of Tengah and Woodlands. The 3-room flats were priced between $330,000 to $345,000 while the 4-room flats were priced between $365,000 to $470,000.
This young couple could go for smaller-sized flats in non-mature towns or save up more for their downpayment to afford a flat closer to the $450,000 range that fits with the 3-3-5 criteria.
At the end of the day, we, as consumers, speak with our wallets. Conveniently located projects in mature towns do cost more and are probably out of reach for most young buyers. These groups of buyers should look for projects that are within their affordability range, even if that means picking smaller-sized units or projects in non-mature towns.
CPF Housing Grants Make Homes (Seem) More Affordable
The government provides CPF housing grants to first-time flat buyers to assist with their home purchase. This can be up to $80,000 under the enhanced CPF housing grant for Built-To-Order (BTO) applicants and up to $160,000 (through enhanced CPF housing grant, family grant, and proximity grant) for resale flat applicants.
Flat buyers should view these grants as an additional buffer for emergency times rather than inflating their downpayment and, thus, affordability. The use of grants to offset the purchase price could lead them to overleverage as their incomes may not support it.
Read Also: Complete Guide To HDB Housing Grants In Singapore For Different Types Of Flats
Most flat buyers are told to apply for their HDB loan eligibility (HLE) letter before they start their property search. In some ways, this could lead to an anchoring bias. And they may end up basing their selection on the maximum loan they can borrow instead of looking from an affordability perspective.
Hence, by starting with the 3-3-5 affordability test, we can have a more prudent assessment and not worry about overfinancing our property purchase, as we have a larger buffer against unforeseen circumstances (such as interest rate hikes or job losses).
Read Also: Beginners’ Guide To HDB Loan Eligibility Letter (HLE) And How To Apply For It
Listen to our podcast, where we have in-depth discussions on finance topics that matter to you.
Retirement Planning
What Is The 4% Retirement Withdrawal Rule, And Why You Should Plan Beyond It
Credit Cards
Complete Guide To Trust Bank’s Products And Services
Credit Cards
Complete Guide To Trust Bank’s Products And Services
