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How To Better Understand Mortgage Affordability After Cooling Measures?

You might have heard of the most recent slate of property cooling measures, announced on 29 September 2022 by the Monetary Authority of Singapore (MAS), Ministry of National Development (MND) and Housing & Development Board (HDB).

The measures were introduced to promote sustainable conditions in the property market by ensuring prudent borrowing and moderating demand. But what does this mean for the affordability of your mortgage payments? We round up the measures and explain their possible implications for your home-buying aspirations.

What are the new measures?

Higher interest rate stress test to assess borrowers’ repayment ability

In terms of property loans granted by private financial institutions, MAS increased the stress test interest rate by 0.5% to compute the Total Debt Servicing Ratio (TDSR) or Mortgage Servicing Ratio (MSR).

This would affect any Option to Purchase (OTP) granted on and after 30 September 2022. If there is no OTP, then it would be on and after 30 September 2022 for the Sale and Purchase Agreement.

In other words, the interest rate floor used to compute the TDSR or MSR was raised from 3.5% per annum to 4.0% per annum for residential properties, and from 4.5% per annum to 5.0% per annum for non-residential properties. These changes also applied to Mortgage equity withdrawal loans. The actual interest rates would still be determined by private financial institutions via their respective mortgage interest rate packages.

As for housing loans granted by HDB, an interest rate floor of 3% was introduced to compute the eligible housing loan amount. This would apply to new applications for HDB Loan Eligibility (HLE) letters received on and after 30 September 2022. However, this would not affect the 2.6% per annum HDB concessionary interest rate.

Read more: Managing Rising Home Loan Interest Rates: Should I Pay Off My Mortgage Early?

Lower Loan-to-Value Limit for HDB housing loans

One of the cooling measures introduced earlier, on 16 December 2021, was the lowering of the Loan-to Value (LTV) limit for HDB housing loans from 90% to 85%. Effective 30 September 2022, the LTV limit was further tightened to 80%. Hence, those taking out HDB housing loans would only be able to borrow 80% of their flats’ values.

This would affect new flat applications for sales exercises launched, and resale applications that were received by HDB, on or after 30 September 2022.

Introduction of a 15-month wait-out period

This measure was intended to moderate the demand for HDB resale flats and ensure they remained affordable. With this new measure, private residential property owners (PPOs) and ex-PPOs were required to serve out a 15-month wait-out period after selling off their private properties before they could be eligible to buy non-subsidised resale flats.

However, this new measure would not apply to seniors aged 55 years and above (together with their spouses) who wished to buy 4-room or smaller resale flats.

Read more: How To Make Your First Property Purchase

How does this affect buyers of private residential properties?

 Maximum Loan-to-Value (75%) and 25 Years Loan Tenure 
Gross Combined Monthly Income
Monthly Loan Payment Ceiling (55% due to TDSR)Stress Test Interest Rate of 3.5%Stress Test Interest Rate of 4%Difference
$12,000$6,600$1,318,356$1,250,386$67,970
$16,000$8,800$1,757,808$1,667,182$90,626
$22,000$12,100$2,416,986$2,292,375$124,611

Based on the above table of illustrations, let’s say a couple with a combined monthly income of $16,000 wants to buy a private property, they could initially offer a buying price of $2.3 million pre-cooling measures.

However, due to the cooling measures and consequently the lower loan amount they would be able to get, they would have to adjust their buying price to $2.2 million. There is a difference of at least $100,000 in the property price they can offer to secure their preferred property.

(Formula to derive buying price in example: $1,667,182 / 0.75 = $2,222,909)

How does this affect buyers of HDB flats?

From the table of illustrations below, you can observe the difference when the LTV limit is tightened from 85% to 80%. The difference in the loan amount that can be taken out may not be significant to some buyers, though it may make a big difference to others.

Property PriceLoan-to-Value of 85%Loan-to-Value of 80%Difference
$500,000$425,000$400,000$25,000
$750,000$637,500$600,000$37,500
$1,000,000$850,000$800,000$50,000

Let’s look at the following table of illustrations. To afford an HDB property price of $750,000, the combined monthly income from the homeowners (assuming a couple is buying this property) will have to be at least $9,500.

(Formula to derive the homeowners’ income in example: $2,845.27 / 0.30 = $9,484)

25 Years Loan Tenure and
3% Stress Test Interest Rate
Property PriceMonthly Instalment at 85%Monthly Instalment
at 80%
Difference
$500,000$2,105.40$1,896.85$208.55
$750,000$3,023.10$2,845.27$177.83
$1,000,000$4,030.80$3,793.69$237.11

Pro tip: Planner Bee’s mortgage calculator can help you estimate your housing repayments 

In summary, the launch of the most recent property cooling measures have reduced the size of housing loans that homebuyers can take out. This, coupled with the rising mortgage interest rates, means that, more than ever before, prudent financial planning is important to ensure that you can afford your dream home and other priorities in your life.

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