Think before you buy (more): The latest property measures were conceived to prevent homebuyers from incurring too much debt beyond their means. Photo credit: Unsplash
There is nothing quite like owning a piece of property to make you feel more secure about life, what with its myriad challenges and sky-rocketing prices. That way, come rain or shine, you know you still have a roof over your head.
Sadly, after a rather buoyant year or so in the property market (strangely, the pandemic seemingly did little to dampen the sentiment), new property curbs were imposed by the government with immediate effect on 16th December 2021, much to the collective dismay of homeowners, homebuyers, banks and of course, property agents.
A press release jointly released by the Ministry of Finance, Ministry of National Development and the Monetary Authority of Singapore states this is being done to “promote continued housing affordability” and “calibrated to dampen broad-based demand, especially from those purchasing property for investment rather than owner-occupation”.
Indeed, the new measures are obviously made to cool the property market – blame it on the high incidence of million-dollar HDB flats – and prevent homebuyers from incurring too much debt beyond their means.
In a nutshell, here are the latest changes:
● An increase in Additional Buyer’s Stamp Duty (ABSD) rates;
● A decrease in Total Debt Servicing Ratio (TDSR) from 60% to 55%; and
● A decrease in Loan-to-Value (LTV) limit for HDB loans from up to 90% to up to 85%.
These measures apply to all types of residential property – be it HDB flats or condominiums. In terms of the ABSD, the government will:
● Raise ABSD rate to 17% for Singapore citizens (SCs) purchasing their 2nd residential property;
● Raise ABSD rate to 25% for SCs purchasing their 3rd and subsequent residential property, and SPRs purchasing their 2nd residential property; and
● Raise ABSD rate to 30% for Singapore permanent residents (SPRs) purchasing their 3rd and subsequent residential property and foreigners purchasing any residential property.
There is no ABSD charge for first-time residential property homeowners who are Singaporeans.
If you registered your intention to purchase a HDB flat with a seller and were issued an Option to Purchase before 16th December 2021, you will not be affected by the change to the TDSR.
Likewise, if you just refinanced a home loan before 16th December 2021, or are refinancing a loan on a home that you are currently living in, the lowered TDSR limit does not apply to you.
Those who are intending to buy a HDB flat for the first time after 16th December 2021 are less affected than those who intend to buy another property after that date.
This is because for the purchase of HDB flats, there is an additional regulation called the Mortgage Servicing Ratio (MSR), which caps your borrowing limit at 30% of your gross monthly income, which is even lower than the TDSR’s 55%.
The MSR is only applicable to housing loans made on a HDB flat or an executive condominium – where the minimum occupation period of the executive condominium has not expired yet.
So if you are affected by the lower TDSR limit, what can you do to get around this slew of market-cooling measures?
The TDSR basically means that the amount of total monthly debt that you have cannot exceed 55% of your monthly income. It is meant to protect borrowers from overleveraging their loans.
The formula for calculating your TSDR is as follows: (Borrower's total monthly debt obligations / Borrower's gross monthly income) x 100%.
Monthly debt includes various debt obligations such as property loans (including the loan you are now applying for), credit card loans, car loans, student loans, and any other unsecured loans.
It may not sound like there is a big difference between a TDSR of 60% and the new limit of 55%, but there is. Here’s an example.
If your gross monthly income is $5,000 per month, a TDSR limit of 60% means you can have a monthly serviceable debt of $3,000. If you have a monthly debt of $2,000, it means you can still borrow $1,000 for your home loan.
But with the new TDSR limit of 55%, your monthly serviceable debt is reduced to $2,750. With the same amount of prior monthly debt obligations, this means you now have only $750 to work with.
Those who were intending to buy private property in addition to the property that they are already staying in will soon find that the amount they can comfortably borrow to be lower than before – and will no doubt feel the pinch. Don’t forget – these homebuyers now have to factor in the higher percentage for the ABSD for a property loan as well.
One way to get around this is to pick a property that you can actually manage financially after taking into account the new limits. If you can, avoid maxing out your TDSR to the full 55%. Take your time to shop around for a suitable property and loan, and don’t be hasty.
Another way is to reduce the amount that you repay monthly for your home loan. The flipside is that the loan amount or quantum will be smaller as a result.
But lowering the monthly payments can be a good move if it means you will be able to make repayment with relative ease.
After all, what is the point of having a higher loan if you can’t make the payments for a property loan every month?
If you are a business owner with an existing private residential property, cashing out the value of your property can be a way of securing funds for your business.
Say you have a property valued at $1 million with $500,000 loan outstanding. With a 75% LTV limit, this means that you can cash out an additional $250,000 less any amount of the loan paid using CPF (including its accrued interest). Note that you will still be subject to the TDSR in this case.
The new measures may make it tough for you to buy another property, but you can try refinancing your home loan by choosing a bank that is offering a more favourable interest rate than what you are paying now.
Or you can transfer your loan to another bank if the lock-in period is over and if your existing loan’s interest rates have increased.
It is a good thing if your property has appreciated in value, since banks only consider the value of the property when determining the LTV limit for a property loan.
If you don’t know how much your property is now worth, you can use our free property valuation tool for a start.
Alternatively, you can pay a valuation fee, which can cost a few thousand dollars.
This is another way to reduce the amount you repay every month for your loan.
As per MAS guidelines, the allowable home loan tenor can go up to 30 years for HDB flats and 35 years for private properties.
However, in most cases, you are likely to end up with a 25-year mortgage if you need your LTV limit to be at 75%.
Most banks are fine to grant a LTV limit of up to 75%, but may reduce your LTV limit to 55% if your loan tenor is deemed to be too lengthy in relation to your age.
Generally, your LTV limit for a property loan will be lower if you can only repay it after 65 years old. This will reduce the amount that you can borrow, and increase the amount of downpayment you have to fork out.
While it has its perks, bear in mind a shorter loan tenor means you have to make higher monthly instalments, which will affect the TDSR or MSR.
Another way to reduce the amount you pay every month is to fork out a higher downpayment.
The LTV limit refers to the maximum amount of funds you can borrow. After taking into account the LTV limit, the remainder would be the amount of downpayment you have to pay upfront – whether by cash and/or CPF Ordinary Account (OA) savings.
The new LTV limit for HDB loans is now up to 85%, but for private property, you can consider going to a bank, which can offer a LTV limit of up to 75%. If the loan is granted, you have to pay the bank a 25% downpayment of the property’s value.
Needless to say, it’s a viable option only if you can afford paying the higher amount in either cold, hard cash or from the funds in your CPF OA.
If none of these options are feasible, and you cannot find a way to work around the situation, it may be wise to postpone your property-buying plans for now.
Better that being unable to make your monthly payments; or worse, having to default on the loan. It is never a good move to bite off more than you can chew.
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Belinda loves thinking about random stuff, and collecting useless bits of facts and trivia. She often roots for the underdog, and believes the world needs more happy endings.
