Singaporeans adore property. Approximately 9 out of 10 Singaporean households own their own property. For the most of us, purchasing a home is likely to be the most significant purchase of our lives.
Purchasing property in Singapore is extremely expensive, with HDB flats starting at several hundred thousand dollars and some topping one million dollars. Private condominiums are even pricier. As a result, most buyers will need to obtain a mortgage to fund their purchase.
The Singapore property market has remained resilient despite global economic headwinds. According to data from the Urban Redevelopment Authority, private residential property prices rose 3.3% in 2023, marking the third consecutive year of price increases. This steady appreciation has further fueled Singaporeans' appetite for property investment, with many viewing real estate as a stable long-term asset.
However, getting a mortgage entails more than simply finding a bank prepared to give the necessary amount. Buyers must also grasp two crucial restrictions that govern how much they can borrow: the Loan-to-Value (LTV) Limit and the Total Debt Servicing Ratio.
The Monetary Authority of Singapore (MAS) defines Loan-To-worth (LTV) as the loan amount expressed as a percentage of the property's worth. For example, if we buy a condominium flat for $1,000,000 and get a $750,000 loan, the LTV is 75%.
The LTV restrictions for property acquisitions in Singapore are now as follows.
If you do not have any existing house loans, your Loan-to-Value (LTV) limit is 75%. However, the more home loans you have, the lower your LTV limit. For example, if you take out a second home loan, the LTV ceiling is reduced to 45%.
There are two conceivable LTV limits: greater and lower percentages. The lower LTV limit (55%) applies if the loan term exceeds 30 years (or 25 years for HDB flats) or if the loan runs past the borrower's 65th birthday. For example, a 50-year-old buyer with no outstanding home loans who obtains a 20-year mortgage will be subject to the lower LTV ceiling of 55%.
The government has implemented these LTV limits as part of broader property market cooling measures. These restrictions aim to promote financial prudence among homebuyers and prevent excessive speculation in the real estate market. By limiting the amount that can be borrowed, authorities hope to reduce the risk of a property bubble and ensure the long-term stability of Singapore's housing market.
For people taking out a HDB home loan, the LTV is 75% of the purchase price or valuation, whichever is lower. If the remaining flat lease does not cover the youngest flat applicant until the age of 95, a lower loan limit is pro-rated from 75%.
Loan-to-Value (LTV) refers to our property's value, not necessarily our purchase price.
Another key fact to remember is that the LTV limit is based on the assessed property value, not the purchase price of a home. So, if we buy a private property for $1.10 million and it is later appraised at $1 million, the 75% LTV will apply to $1 million rather than our purchase price of $1.10 million. This implies the bank can only loan us $750,000, with the remaining $350,000 paid in cash and CPF.
How the Total Debt Servicing Ratio (TDSR) affects how much you can borrow.
While the LTV limit indicates how much banks can lend us, the Total Debt Servicing Ratio (TDSR) determines how much we can borrow from them. The two amounts are not usually identical. Just because a bank can lend to us does not guarantee we are eligible for the total loan amount.
According to MAS, the Total Debt Servicing Ratio (TDSR) is the percentage of a borrower's gross monthly income used to fulfill monthly debt obligations, including the loan being requested for. Currently, the borrower's TDSR should be less than or equivalent to 55%.
The TDSR framework was introduced in 2013 and has since been adjusted several times to reflect changing economic conditions. Its primary purpose is to encourage financial prudence among borrowers and prevent over-leveraging. By limiting the portion of income that can be used for debt repayment, the TDSR helps ensure that borrowers can comfortably manage their loan obligations even if interest rates rise or their income decreases.
According to the Total Debt Servicing Ratio (TDSR) ratio, an individual earning $6,000 per month should not have monthly debt commitments exceeding $3,300, which is 55% of their income. This limit applies to several sorts of loans, including car loans, renovation loans, school loans, and credit card debt.
Before applying for new loans, you must first do the arithmetic to determine how much you may borrow.
Assuming a monthly salary of $6,000, the TDSR ceiling is $3,300. If you already have a $1,000 monthly auto loan, your mortgage payments cannot be more than $2,300. For example, if you want to take out a $600,000 loan with a 25-year term and a 2.6% interest rate, your monthly payback will be $2,722, which exceeds the TDSR limit. As a result, you wouldn't be eligible for the loan. This is an important consideration before proceeding with a property acquisition.
However, paying off your auto loan first will reduce your monthly debt obligations and boost your borrowing ability. Once the car loan is paid off, you can apply the entire $3,300 toward your mortgage, allowing you to qualify for the necessary housing loan.
One option to meet the TDSR requirement without reducing the amount we want to borrow is to extend the term of our house loan.
While this is a reasonable choice, we must keep in mind that having a longer loan tenure not only raises our total interest expenses, but it may also mean that our LTV limit decreases. Remember that if the loan length exceeds 30 years (or 25 years for HDB flats), or if the borrower is over the age of 65, the LTV ceiling will be reduced.
Another factor influencing our TDSR is the interest rate. Effective September 30, 2022, the interest rate floor used to calculate the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) for home loans granted by financial institutions is set at 4% per annum. This indicates that the interest rate used to measure borrowers' repayment ability is considered to be at least 4.0%.
The implementation of this interest rate floor serves as a stress test for borrowers, ensuring they can manage their loan repayments even if interest rates rise significantly. This measure is particularly relevant in the current global economic climate, where many central banks are raising interest rates to combat inflation. By using a higher interest rate in TDSR calculations, regulators aim to protect borrowers from potential financial distress if rates continue to climb.
Mortgage Servicing Ratio (MSR) also applies to HDB flats.
If we acquire a HDB flat or executive condominium, we must comply with the Mortgage Servicing Ratio (MSR) standards. According to MAS, MSR is the portion of a borrower's gross monthly income used to repay all property loans, including the one being applied for. MSR is limited to 30% of the borrower's gross monthly income.
As of September 30, 2022, a new interest rate floor of 3% was implemented to calculate the acceptable loan amount. While this would not affect the interest rate paid, it would lower the maximum amount we could borrow.
For example, if you want to obtain a $300,000 loan from HDB, the actual interest rate will be 2.6%, resulting in a monthly repayment of around $1,360. This equates to an income of around $4,530, with 30% MSR. However, HDB will use a 3% interest rate to calculate the monthly repayment of approximately $1,420 and use that to estimate the maximum amount you can borrow under the MSR. To borrow the same amount, your income must be $4730, which is $200 more than before.
Higher loan-to-value (LTV) limit for HDB housing loans
The LTV ceiling for HDB flats purchased with a HDB Housing Loan is now 75% (it was 80% before to August 20, 2024).
As we can see, finding the ideal home and paying the right price aren't the only things to consider when purchasing a property. To ensure that we may complete the purchase for our dream property, we must first meet the LTV and TDSR requirements.
