Buying an HDB flat is almost akin to a rite of passage in Singapore, with a home ownership rate of 87.9%. For first-time buyers (or even second-time buyers), affordability remains the key concern when it comes to buying an HDB flat.
To avoid home buyers overstretching themselves for their property purchase, the government has put in place measures that determine affordability and restrictions on borrowing. While measures such as restrictions on loan tenure and Loan-To-Value (LTV) limits do affect affordability, the two major measures that affect how much we can borrow to finance a mortgage are the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR).
How Total Debt Servicing Ratio (TDSR) Affects How Much You Can Borrow For Housing
The Total Debt Servicing Ratio (TDSR) is the ratio that determines how much we can borrow from the bank. It refers to the portion of a borrower’s gross monthly income that goes towards repaying the monthly debt obligations, including the loan being applied for. A borrower’s TDSR should be less than or equal to 55%.
For example, if we earn a salary of $6,000, our TDSR cannot exceed $3,300 (55% of $6000) a month. If we already have an existing car loan repayment of $1,000, this means our monthly mortgage repayment cannot exceed $2,300. If we take a $600,000 loan, with a loan tenure of 25 years and an interest rate of 2.6%, our monthly mortgage repayment will be $2,722, which exceeds the 55% TDSR. Hence, we won’t qualify for the loan.
However, if we can pay up our car loan first, this will free up our monthly debt obligations to borrow more for our property purchase. After clearing our car loan, we will be able to borrow up to $3,300 — allowing us to be qualified for the housing loan we need. If we have any outstanding credit card loans or personal loans, these will also add on to our existing debt obligations and reduce the amount of housing loan we qualify for.
Thus, it would be good practice to pay off as much debt obligations as we can before seeking the in-principle approval for a bank housing loan.
How Mortgage Servicing Ratio (MSR) Affects How Much You Can Borrow For An HDB Flat
While the TDSR applies for all property buyers, HDB buyers have another ratio to contend with: Mortgage Servicing Ratio.
Mortgage Servicing Ratio (MSR) is the maximum percentage of our gross income that we can use to service all our property loans. The current MSR limit is capped at 30% and is applicable for loans from banks and HDB.
For example, if we earn a salary of $6,000, our MSR cannot exceed $1,800 (30% of $6000) a month. This means that even though we qualify for a $600,000 loan under the TDSR, we may not be able to qualify for a $400,000 loan under MSR, as the mortgage payment would be $1,814. Instead, our maximum loan may be around $390,000, just below $400,000.
TDSR and MSR are two measures that determined by the buyer/ borrower (or more specifically by the borrower’s income). We can increase the amount we can borrow if we can increase our income or reduce our loan obligations. However, there is another factor that the buyer cannot control that affects how much we can borrow – valuation.
Valuation Can Also Affect How Much You Can Borrow
The valuation of the property affects how much we can borrow because the maximum loan we can take is determined by the valuation and the Loan-To-Value (LTV) limit.
The LTV limit is the loan amount as a percentage of the property’s value. For example, if we purchase a HDB flat for $500,000, the maximum loan we can take is $425,000 (85% LTV for HDB loan) or $375,000 (75% LTV for bank loan).
However, if the valuation of the property is lower than the purchase price, the LTV limit will apply using the valuation price. For example, the selling price of the flat we want to purchase is $500,000 but the valuation is $450,000. The maximum loan we will be able to take is $382,500 (85% LTV for HDB loan) or $337,500 (75% LTV for bank loan). This applies even if we qualify for a higher loan with our income under TDSR and MSR.
Buy A Home You Can Afford
TDSR, MSR and LTV limits are all measures that the government has put in place to ensure that buyers don’t overburden themselves with housing loans that they cannot afford to repay. The current low-interest rates may make it look very affordable to repay a slightly larger home loan. However, buying a home that you can afford in the long run instead of looking at the maximum you can borrow may give you future peace of mind when interest rates change in the future.
If you are thinking of buying a home, consider engaging the help of a mortgage broker who can walk you through the process. Having a good, trusted broker like our friends at RedBrick can give you peace of mind, knowing that you will always get the best rates out there and enjoy unparalleled service.
The best part? The service is free for you since brokers like them receive their commissions from the banks. Whether you want the best loans rate or just someone to walk you through the process, feel free to get a non-obligatory quote and consultation.
Simply fill in the contact form and an experienced Redbrick mortgage specialist will be in touch with you for a non-obligatory consultation.
Top photo by Moo Kar Ming, DollarsAndSense
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