So the buying bug has bitten. With so many amazingly beautiful apartments and condos on the market for sale, many people ask themselves why they’re still in a rental.
First, there’s no reason to keep pouring rent money into a bottomless pit. Second, there’s the huge incentive of knowing that the value of property you buy, when purchased wisely, will rise in the long term.
However, buying a home of your own may be one of the most expensive things you ever do, so the first thing to figure out is how much you can afford to spend, and how much mortgage you’ll be able to get.
There are a few basic issues to be familiar with in order to know how much you can borrow.
Total Debt Servicing Ratio (TDSR)
Of all the latest government cooling measures introduced in Singapore recently, the concept of Total Debt Servicing Ratio (TDSR) is one of the most important.
Basically, this is a safety net to ensure that people don’t overextend themselves financially by taking out too many loans. It has been so effective that it’s generally credited with being the main reason for the slowdown in the housing market here.
The latest change in the TDSR limits (in 2013) imposes a borrowing ceiling of 60% of monthly income. It is important to remember that this doesn’t apply only to real estate loans; it also includes the likes of car loans and credit card debt.
If we take the example of someone earning an average monthly household income in Singapore, our starting point is SGD 10,503. Sixty percent of that gives us a total of SGD 6,301 which may be borrowed. It is then just a matter of working out which properties would cost you this amount or less each month.
Of course, not everyone is comfortable using so much of their monthly income for their mortgage. This calculation simply gives you the maximum amount that can be borrowed. It is then up to you to decide whether you spend less or try to get a loan than utilises the full extent of your available TDSR limit.
Mortgage Servicing Ratio (MSR)
Together with the TDSR limit, another of the cooling measures is the Mortgage Servicing Ratio (MSR). This is a move which has limited the amount of a person’s monthly income that can be used to buy HDB flats and Executive Condominiums.
As with the previous measure, this is all about making sure that homebuyers don’t spend more than they can afford to pay for their new property. At the moment, this limit means that monthly mortgage payments on HDB flats and ECs may not exceed 30% of the borrower’s monthly income.
This limit is in place regardless of whether the loan is arranged through a bank or through HDB. At the same time that this measure was introduced a reduction in the maximum loan term was announced.
Bank loans for HDB flats can now be taken out for a maximum of 30 years. HDB housing loans are restricted to 25 years.
An example, in this case, shows that someone earning SGD 30,000 monthly can dedicate SGD 9,000 to borrowing for one of these types of property.
Again, you may decide to spend a lower amount than the maximum that you are allowed to use, but you can’t go over it.
Loan to Value Limits
It is worth bearing in mind that having money to put down as a deposit gives you a lot more flexibility when looking for a house to buy. The figures we have looked at so far are for loan amounts. The size of the deposit you’re able to put down will decrease the amount you need to borrow.
Being able to afford a larger deposit allows you to consider more properties. If you don’t have enough savings to do this, you might need to wait until you build up some more capital before you proceed.
However, there is another reason to pay attention to the current loan to value (LTV) limits. These limits vary according to your situation and the type of property you want to buy.
For example, if you want to buy an HDB flat with a loan from HDB then you need to make a down-payment of 10% of the lower of either the market value or purchase price. If you don’t have the money needed to do this, then, unfortunately, there is simply no way to proceed until you do.
On the other hand, to buy an HDB flat with a bank loan means putting down 20%, provided that you don’t already have other outstanding housing loans.
It is well worth spending a few minutes looking at the various limits before you get started so that you can understand how much you need to have as a down-payment.
How does it all Affect You?
The different types of government legislation in place – such as TDSR and MSR – now make it reasonably difficult to work out how much you can borrow to buy a home. However, with a bit of effort and some investigating you can calculate the figures for your own individual situation.
It usually works out best to look up an online mortgage calculator and use it to work out everything for you. All you have to do is type in your basic details and let it do the mathematics.
Bear in mind that the restrictions are there to encourage responsible borrowing and to stop people from buying homes that they really can’t afford.
Having said that, you still need to be sufficiently certain that you can afford to pay back what you borrow, rather than relying on the limits to determine this for you. If you have additional commitments, you might not feel comfortable borrowing the maximum that the government has calculated as your allowance.
In other words, you might meet all of the official criteria but still feel your lifestyle or aspirations give you the feeling that you would rather not borrow as much as you are entitled to.
By spending some time getting this aspect of the house-buying process right, you can get the perfect place to live at a price you can truly afford.
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