Homebuyers have to do their sums carefully to avoid being unable to qualify for a sufficient housing loan. (Photo: Samuel Isaac Chua/EdgeProp Singapore)
SINGAPORE (EDGEPROP) - Financial literacy is extremely important, especially when you are applying for a mortgage loan. First-time buyers are likely to be confused by numerous terms that they have to grapple with. In this article, we explain three important terms that all homeowners should know.
How does LTV impact my loan amount?
The name, loan-to-value ratio (LTV), says it all. Basically, it indicates the percentage of the value of a residential property that can be financed via a housing loan. With effect from July 2018, LTV for buyers borrowing from a bank was tightened from 80% to 75% for those with no outstanding housing loan. LTV was also reduced to 45% if the borrower has one outstanding housing loan and 35% if the borrower has two or more outstanding housing loans.
The reduction in LTV means that the amount that owners can borrow to finance their housing purchase is lower. For example, an owner purchasing a $1 million condo would be able to borrow up to 80% of $1 million (or $800,000), if he has no outstanding housing loans, before LTV was tightened. However, the same owner would be able to borrow only 75% of $1 million ($750,000) after LTV was reduced. The amount that the owner can borrow will be further reduced if he has at least one outstanding housing loan.
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In September 2022, the LTV for housing loans from HDB was also reduced by 5 percentage points to 80%. This means that the LTV for HDB loans and bank loans differ by only 5 percentage points. As such, there is less incentive for buyers of HDB flats to borrow from HDB in a low-interest-rate environment, especially if the interest rate from banks falls below the prevailing interest rate of 2.6% offered by HDB. The interest rate for HDB housing loans is pegged at 0.1% above the prevailing CPF ordinary account interest rate, which may be adjusted by the government.
What is TDSR?
Another measure introduced by the government to encourage financial prudence is the Total Debt Servicing Ratio (TDSR), which adds further restrictions to the amount of housing loan that owners can obtain. TDSR was reduced from 60% to 55% in December 2021. This means that the monthly mortgage repayment plus all monthly expenses and other loan repayments must not exceed 55% of the borrower’s monthly income.
The median household income was $10,869 per month last year, which means that the monthly mortgage payment plus all other loan payments and expenses for the household cannot exceed $5,977.95 (55% of $10,869). Assuming that the average monthly expenses for the household are $2,500 and the monthly car loan repayment is $1,000, the monthly mortgage repayment for the household cannot be more than $2,477.95, which is calculated by subtracting monthly expenses of $2,500 and car loan payments of $1,000 from $5,977.95. Potential homebuyers would be advised to do this simple calculation to determine a comfortable price ceiling before they start their property search.
Borrowers should note that the actual bank interest is not used when calculating if they meet the TDSR restriction. Instead, banks will use a medium-term interest rate, which has been raised by 0.5 percentage points to 4% for bank loans and by 0.4 percentage points to 3% for HDB loans.
Buyers with significant savings in their bank account or CPF may wish to reduce the amount they borrow by paying more cash upfront for their housing purchase. By borrowing a smaller amount, it might help them meet the LTV and TDSR restrictions. Alternatively, buyers can increase their loan tenure to reduce their monthly housing loan repayment and hence meet TDSR restrictions. However, borrowers should bear in mind that housing loan tenures are capped at 30 years for HDB flats and 35 years for private residential properties.
HDB buyers should know about MSR
Mortgage servicing ratio (MSR) is the portion of the borrower’s monthly income that is used to repay all housing loans, including the loan that the borrower is applying for. MSR is currently capped at 30% of the borrower’s gross monthly income. MSR is applicable only to buyers of HDB flats as well as buyers of executive condominiums where the minimum occupation period has not expired.
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For example, if the borrower has a gross monthly income of $6,000, then his monthly repayments for all his housing loans cannot be more than $1,800 per month (30% of $6,000).
Buyers of HDB flats and executive condos should note that the amount of mortgage loan that they can obtain is subject to TDSR and MSR.
Conclusion
Buying a home can be an exciting experience, especially for newlywedded couples and first-time buyers. However, it can turn into a financial headache very quickly if buyers do not do their sums carefully. We hope that buyers will have a clearer understanding of some regulations that will affect their ability to finance their housing purchase after reading this article. Borrowers may also want to use our Affordability Calculator to calculate if they can afford their dream home.