Part 2 - Affordability and Housing
Part 2 - Factors that a buyer will need to consider when purchasing a property
In Part 1 of this series, we listed some factors that will affect your affordability and needs serious consideration before you purchase a property. Part 2 will explore these factors in greater depth. The factors are:
- Total Debt Servicing Ratio (TDSR)/Mortgage Servicing Ratio (MSR)
- Buyer’s Stamp Duty and Additional Buyers Stamp Duty (ABSD)
- CPF funds allowable for down payment, stamp duties and legal fees and cash reserves
- Loan-To-Value (LTV) and Cash-Over-Valuation (COV)
- Monthly mortgage repayment and loan tenure
- Reserve fund for fluctuations in interest rates, loss of income, emergencies etc
- Other miscellaneous expenses like property tax, maintenance/conservancy charges, fire and mortgage insurance, and renovation and repairs
Total Debt Servicing Ratio (TDSR)
The TDSR was implemented on 29 June 2013 by the Monetary Authority of Singapore to prevent private property buyers from over-extending themselves and getting into excessive debt through risky financial behavior such as property speculation.
The TDSR limits your loan quantum such that all your monthly repayments for your debt obligations do not exceed 60% of your monthly income. Debts included in this 60% are:
- Mortgage loans
- Car loans
- Student loans
- Personal loans
- Renovation loans
- Credit facilities/installments from retailers
Mortgage Servicing Ratio (MSR)
The MSR applies to HDB and Executive Condominiums (EC) purchases. The MSR ratio is 30%.
The MSR limits your loan quantum such that the repayment of your monthly mortgage loan should not exceed 30% of your monthly income.
That means that even if you have no outstanding debts and can borrow 60% of your gross monthly income under the TDSR, if you want to buy an HDB flat or EC, the most you can borrow is only 30% of your gross monthly income.
What if you need a higher TDSR to afford your desired property?
There are a few ways to increase your 60% ratio:
- Reduce your debt: Pay off some of your debts so that you can free up your monthly income for repayment of your home loan
- Lower the loan quantum that you borrow and pay a higher down payment instead
- Ask the bank for an exemption. This will be reviewed on a case-by-case basis
For homeowners with existing property loans who need to refinance their properties, the MAS has made some exemptions to the TDSR. Read more about it here. To get a more detailed understanding of how TDSR works, what gross monthly income and variable income entails, what the “stress test” interest rate is, or how joint loan application affects you, read our TDSR article.
Buyer’s Stamp Duty (BSD) and Additional Buyers Stamp Duty (ABSD)
The BSD is applicable to ALL property purchases, whether residential or industrial. A simple way to calculate:
|Properties above $360,000 but below $1,000,000 :||3% - $5400|
|Properties above $1,000,000 :||4% - $15400|
The ABSD applies to purchasers of second properties. Singapore citizens will have to pay 12%, permanent Residents pay 15% and foreigners pay 20%. The first marital home between a foreigner and Singaporean is exempt from ABSD, as are citizens of certain countries ( Nationals and Permanent Residents of Iceland, Liechtenstein, Norway or Switzerland. Nationals of the United States of America).
To check on your ABSD status, use our ABSD calculator HERE.
Using your CPF funds for your property purchase
Our CPF funds can be used to pay for stamp duty, legal/conveyancing fees and mainly for the down payment of the purchase, as well as the subsequently monthly repayment. You can decide how much you wish to allocate simply by logging into your account using your Singpass. You have the flexibility to change these arrangements at any time.
If you are buying a HDB flat using the HDB concessionary loan, up to 90% of the flat value can be financed by the loan. The remaining 10% can be paid with the CPF Ordinary Account (OA).
If you are taking a bank loan, regardless of whether it is for a private property or a HDB flat, you may loan up to 75%. Out of the remaining 25%, 20% can be paid with the CPF OA/cash and 5% must be by cash.
(Read more about the pros and cons of taking HDB versus bank loan in this article by moneysmart.sg)
Conditions for the use of your CPF funds
- You may not use CPF Ordinary Account (OA) for properties with remaining lease of less than 30 years old.
- If the property’s remaining lease is less than 60 years, but at least 30 years, ensure that you age plus the remaining lease is not more than 80 years.
- There is a cap to the amount of CPF funds you can use to pay your bank loan called the CPF Withdrawal Limit (WL). This cap is currently 120% of the Valuation Limit (VL) of your property. The VL means the purchase price or the valuation of the property, whichever is lower.
- Once your usage reaches the VL, you would need to set aside the Basic Retirement Sum before you can continue using the CPF funds up to the maximum WL of 120%
Mr Tan buys a property at $550,000.
The property is valued at $500,000 so his VL is $500,000
His maximum CPF usage, (the WL), is $600,000 at 120% of the VL
Once he has used up to $500,000 of his OA funds, he will need to set aside the Basic Retirement Sum before he can continue using his OA funds.
Should I use all my CPF for my property repayments?
- The CPF was primarily for retirement. The more you put into property, the less you have to retire on.
- CPF contribution rates will be reduced with age, especially after 50 years old.
- If you have commitments on your CPF, do be mindful how much you use. Items may include insurance premiums or offspring’s tertiary education fees.
- Remember, you will need to be insured under the Home Protection Scheme when you use your CPF for the monthly repayment of your property loan
- An important point to note is that the CPF pays an interest rate of 2.5%. Using cash is preferable as it will allow you to earn a higher interest rate (than bank savings account interest rate) in your CPF savings.
- Upon the sale of your property, you are required to return the CPF funds with accrued interest back into your account.
- It is also prudent to leave some cash reserves in your CPF for rainy days and emergencies so that you are able to repay your mortgage on time.
Loan-To-Value (LTV) and Cash-Over-Valuation (COV)
The LTV is the ratio of the loan to the value of the property. The maximum LTV is 75% for bank loans. This means that if property X is valued at $1,000,000, you are allowed to loan a maximum of $750,000.
The COV means the amount of cash you pay over the valuation of the property. If the purchase price of the property X is $1,100,000 but its valuation is $1,000,000, you will need to fork out the difference of $100,000 (COV) in cash.
Therefore, the total amount of cash you need to set aside is at least $100,000. On top of that, you will need to fork out a minimum of 5%, $50,000, as part of the down payment. The rest of the 20% down payment can be CPF or cash.
Below is a chart showing you the different LTV depending on how many mortgage loans you have.
|1st Housing Loan|
|Loan Tenure||Up to 30 years||31-35 years|
|Age||Up to 65||>65|
|2nd Housing Loan|
|Loan Tenure||Up to 30 years||31-35 years|
|Age||Up to 65||>65|
|3rd Housing Loan onwards|
|Loan Tenure||Up to 30 years||31-35 years|
|Age||Up to 65||>65|
Monthly mortgage repayment and loan tenure
Your monthly repayment for your housing loan comprises of the principal repayment and the interest payment. Factors affecting how much you pay are:
- The size of your loan
- The tenure (number of years)
- Interest rate
- Type of loan (fixed or variable interest)
A longer tenure will mean lower monthly repayments but higher total interest paid. You may wish to note that your CPF has a Withdrawal Limit of up to 120%. You may need to pay by cash if your total withdrawal exceeds this limit.
Types of Loans
- Fixed Rate: In an environment of rising interest rates, this package is more attractive. Usually the interest rate is fixed for a few years before it reverts to a floating rate
- Variable Rate: These packages are tied to a reference interest rate such as the SIBOR or SOR.
Some Points to Note
- Lock-in Period:
This is the number of years where the borrower cannot make changes to their loan package in order to enjoy a promotional rate. He cannot switch to another bank during this period ranges from 1-5 years. During this period, there will be a penalty of typically 1.5% of the loan redeemed should the property be redeemed in full. A fixed rate package usually comes with a lock-in period where you secure the promotional interest rate. This is beneficial to the borrower in an environment of rising interest rates. However, with a floating rate package, a lock-in period may not be beneficial, especially when interest rates rise too fast and you are unable to switch your loan package. If you are intending to sell your property, it is advisable not to take up loans with the lock-in period.
- Early Repayment Penalty:
Some banks impose a penalty should you wish to redeem your loan partially or in full in order to save on interest paid. This penalty usually corresponds with the lock-in period and incurs a 1.5% on the amount redeemed. Some banks allow partial payment without penalty whatsoever for up to 20% of the loan, and others have a minimum loan amount after early repayment. It is advisable to check the terms of your loan package before taking it up if you need this flexibility.
- Repricing Fee:
Repricing means taking up a new loan package with the same bank after your current package has expired. The bank may charge you a fee of between $200-$800 for taking up a new loan with them. You can choose to refinance with another bank in order to avoid these fees as they often cover the costs involved and subsidize any legal fees.
- Cancellation Fee:
This fee is imposed when the loan is cancelled before disbursement. The 1.5% is more applicable to Building Under Construction (BUC) properties under the progressive payment scheme where the bank disburses the loan in stages according to the completion of construction stages. If the borrower switches to another bank before the TOP, he will be subject to the cancellation fee on the amount that is yet to be disbursed.
Reserve fund for fluctuations in interest rates, loss of income, emergencies etc
We do advise our clients to exercise prudence when purchasing a home. Being late for the mortgage repayments has consequences that may result in you losing your home. If you are facing difficulties in repaying your loan on time, do approach your bank immediately to discuss how you can restructure your loan.
We urge borrowers to have a reserve fund of ideally 6 months’ total expenses for bad times where there is retrenchment, illness or changes in life circumstances.
Other miscellaneous expenses like property tax, maintenance/conservancy charges, fire and mortgage insurance, and renovation and repairs
In Singapore, property tax on completed properties (as opposed to Building Under Completion), comes around once a year on 31 Jan. The amount you have to pay depends on the Annual Value of your home, and whether it is owner-occupied or not. To read more about property tax, click HERE.
HDB properties will be subject to conservancy charges and carpark charges. Condominiums charge a maintenance fee that depends on the Share Value that your unit commands. This amount varies from development to development. Some projects charge a separate carpark fee. There may also be a sinking fund collected after 5 years which goes towards the repair of the common property. For landed property, you are liable for your own upkeep.
If you are getting a resale property, you may have to factor in a substantial amount of renovation cost depending on the condition of the unit. A property from the developer is brand new and will require less extensive renovation, plus there is a defects-free period of one year where any repairs will be handled by the developer.
All these miscellaneous expenses will have to be factored in even though they are minor costs when you consider how much you can spend on your property.
If you are considering buying a property but are unsure of what you can afford, do contact our HomeReward consultants for a no-obligations discussion on your needs and what is available currently in the market.
Disclaimer : This article is intended as a guide and we have taken every reasonable effort to ensure the accuracy of these information. Information is correct as of 21 March 2018.
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