This article was written in collaboration with PropertyGuru. All views expressed are the independent opinion of DollarsAndSense.sg. You can refer to our Editorial Policy here.
For most people in Singapore, property is likely to be the biggest ticket item they will buy in their entire life. This is why besides making sure you like the property, it’s also important to ensure that you can afford the place that you intend to purchase.
Affordability isn’t just about being comfortable with the price you are paying. You also need to meet the legal requirements set by the authorities, otherwise, you won’t be allowed to buy the property – even if you feel you can afford it and are willing to pay the asking price.
In this article, we highlight 5 factors that you need to consider to assess whether you can afford to buy a particular property.
For this article, we have assumed that buyers are Singaporeans and that they are buying their first property.
#1 Minimum Down Payment Required
When buying your first property in Singapore, you need to put a down payment of at least 25% first, of which at least 5% needs to be in cash. The remaining 20% can be paid using cash, CPF, or a combination of both. The remaining 75% is the maximum that the bank is allowed to lend you. This is known as the loan-to-value (LTV) limit.
For example, if you buy a property for $1 million, you will need a minimum of $250,000 (25%), of which at least $50,000 (5%) needs to be in cash. If this is your 2nd or subsequent property, your LTV will be lower and hence the down payment that you will need would be higher.
One common misconception that some buyers have is that they will surely be able to borrow the LTV of 75% when taking their first housing loan. This isn’t true.
The LTV only represents the maximum amount that banks legally able to lend you. However, depending on your financial circumstances, the bank might not be willing to lend you the full 75%. For example, the bank may only be willing to lend an older buyer 60%. In such instances, buyers are required to put up a higher down payment.
Also, the LTV is based on the bank’s valuation or the purchase price of the property, whichever is lower. So, if you purchase a property for $1 million, but the bank’s valuation for it is $950,000, they will only lend you a maximum of $712,500, which is 75% of $950,000. This means you need to cough up a higher down payment.
For those buying an HDB flat and choose to take an HDB concessionary loan, the down payment required will be 10%, which can be paid using your CPF savings, cash, or a combination of both.
#2 Buyer Stamp Duty
Buyer Stamp Duty (BSD) is a cost that some buyers don’t take into account until after purchasing their property. However, it’s a significant cost that you can’t afford to ignore, especially since it has to be paid using cash.
How much Buyer Stamp Duty fee you have to pay is based on the following formula.
For Singaporean property buyers, a $1 million property will incur a Buyer Stamp Duty fee of $24,600.
Because this fee has to be paid using cash/CPF, you should include this amount during your planning process alongside your cash down payment, so that you have a clear understanding of how much cash you need to cough up.
For example, if you buy a $1 million property, your minimum down payment is 25%, this would be $250,000. If you add your stamp duty fee to it, the total minimum cash outlay you have to pay is $274,600.
Do note that if this is your second or subsequent property, you will incur an additional stamp duty fee (ABSD) of at least 12% of the property price. Foreign buyers will need to pay an ABSD from their first property onwards.
#3 Total Debt Servicing Ratio
Property buyers who want to take a loan from a bank need to be within the allowed Total Debt Servicing Ratio (TDSR).
TDSR takes into consideration all other loan repayment obligations a buyer has. These include property loans, car loans, student loans, renovation loans, credit card balances and any other secured or non-secured loans that you may have.
TDSR is set at a maximum of 60% of the borrower’s monthly income.
For example, if your monthly income is $5,000, your TDSR will be $3,000. This means if you have existing loans (e.g. car loan, student loan) that already requires a monthly payment of $1,000, the bank can only lend you an amount that does not require a repayment exceeding $2,000 per month.
#4 Mortgage Servicing Ratio
The Mortgage Servicing Ratio (MSR) refers to the portion of a borrower’s gross monthly income that goes towards repaying all property loans, including the loan being applied for.
MSR is capped at 30% of a borrower’s gross monthly income.
For example, a couple who earns a combined $6,000 per month would have an MSR of $1,800. This means they cannot take a loan that would require them to make a monthly mortgage payment of more than $1,800.
Note that MSR is only applicable to HDB flats or an Executive Condominium bought directly from the developer. In other words, these buyers have to meet both the MSR and TDSR requirements.
#5 Maximum Loan Tenure
One workaround for TDSR and MSR is to take a longer loan tenure to stretch out the loan. This allows buyers to reduce their monthly mortgage repayment.
Unfortunately (or fortunately), the Monetary Authority of Singapore (MAS) already has rules for this. The maximum loan tenure is 30 years and 35 years for HDB flats and non-HDB properties respectively.
If you take a loan with tenure above 30 years (for non-HDB properties) or above 25 years (for HDB properties), you will also need to pay a higher down payment, due to lower allowable LTV limits.
PropertyGuru Finance Helps You Determine Your Home Affordability
By now, it should be clear that calculating your home affordability is not as simple as looking at the selling price and deciding if it is a good buy.
Factors covered in this article, such as the down payment, cash on hand and how much you can borrow that would determine how much you can afford to spend on a property. Other variables that you can’t ignore also include stamp duties, how many properties you have already bought and your nationality.
To help potential buyers find out what is their right budget, PropertyGuru Finance has introduced an affordability calculator to help you calculate how much you can afford to spend on a property purchase through a few simple inputs.
Once you know your maximum affordability, PropertyGuru Finance is also able to match you to the right property listings on its platforms that are within your budget. This allows you to search for properties more efficiently, with the confidence of knowing that the listings you view are all within your budget.
Since getting a loan is an integral part of buying a property, PropertyGuru Finance also helps you find the most competitive home loans through its loan comparison platform. The PropertyGuru Home Finance Adviser guides you through the entire process of securing a home loan and answers any questions that you have along the way.
Similar to other buying decisions, it’s always prudent to understand what’s your budget before you start your search for a new property. You can do so by understanding the rules that govern the purchase of a property in Singapore and using an affordability calculator.