Alongside the likes of Hong Kong and Tokyo, Singapore’s property market has often been regarded as one of the most expensive in the world.
A four-room public housing resale flat in Bishan can go beyond $600,000 while a 1,000 sq ft private apartment in the city fringe can set you back $1.5 million in 2022. While property prices show no signs of declining, it has not stopped aspiring Singaporeans from going after their dream homes.
As more Singaporeans look towards owning their own dream home, many are tapping into their CPF monies fully or partially plus cash savings to service their monthly mortgage payment. While homeowners can find many ways to go about purchasing properties, buyers should always do their homework.
It is important to ascertain how much CPF funds can be used for housing, and thoroughly assess one’s financial commitments and expenses, such as living expenses, credit card bills, car loan repayment, contributions to parents etc. Such information will help the buyer determine how much he/she can set aside as the housing budget.
This is important as such steps will help buyers find a home that fits their budget realistically and prevent homeowners from overstretching themselves on their home purchase.
In Singapore, there are several financial mechanisms and safeguards in place to ensure that all home owners do not over-leverage and buy beyond their means. Firstly, there is the loan-to-value ratio limit, which restricts the maximum amount of bank loan an individual can take out based on the property value. Depending on whether one is getting an HDB or a private residential home, the loan value can only be 85% or 75% of the property value respectively.
In order to ensure that buyers do not purchase beyond their financial means, the housing market has two other measures in place – Mortgage Servicing Ratio (MSR) and the Total Debt Servicing Ratio (TDSR). For buyers of HDB flats, they are regulated by the MSR, which stipulates that buyer’s monthly mortgage payments should not exceed 30% of their monthly income (as illustrated below).
For instance, in a case where a household earns a combined monthly income of $7,000, they should ideally be forking out a maximum of a rough $2,000 each month for their monthly mortgage, which is 28.6% of their monthly income.
Next is an illustration of what would be the minimum income required, depending on the price of the HDB flat. For a couple earning a combined household income of slightly less than $8,000, they should look at flats priced around or below $600,000 to meet the stipulated 30% MSR.
While such measures in place will help buyers assess affordability and prevent them from overstretching, it is best for buyers to thoroughly assess their bills, payments and other expenses. This will allow buyers to comfortably go through with the payments each month.
MSR Simulation – Affordability Table
Assuming a loan for a HDB flat for 25 Years at an interest rate of 2.5%
For buyers of private residential property, they are required to meet the TDSR, which stipulates that the buyer’s total debt obligation, including property loan, credit card expenses, car loan, education loan, renovation loans, should not exceed 55% of their monthly income.
Take the example above, for a couple to meet the TDSR, they should not spend more than 55% of their combined monthly income on their monthly mortgage payment. Say a couple is earning $10,000 a month with commitments like credit card and the car loan payments each month, all these need to be taken into consideration. This means after adding their credit card expenses at $1,200 and their monthly car loan payment of $1,000, the total amount $2,200 is also calculated as part of the TDSR.
After adding an estimated monthly mortgage of $3,000, the total would be 5,200, amounting to 52% of the TDSR. Thus, buyers of private residential property need to keep in mind that their calculation of the TDSR includes all their total debt obligation – which includes existing property loan, credit card expenses, car loan, education loan, renovation loans.
TDSR Simulation – Affordability Table
Assuming a loan for a Private Condominium for 25 Years at an interest rate of 2.5%
Looking at the table above, if a couple is earning a combined household income of around $12,000 per month, assuming they have other debt obligations amounting to $2,500, they could look at private homes priced around or below $1,200,000 to meet the stipulated 55% TDSR.
For those earning much more, they can look at pricier properties but keep in mind that couples earning more will likely be spending more for their lifestyle, commitments and other obligations – which is why it is essential for the government to put the TDSR in place.
This ensures buyers are not overstretching or making major changes or raking up debts right after committing to purchase a property. But while these financial safeguards can prevent a buyer from spending beyond their means on housing, it would be wise to include additional buffers to account for savings.
It is important to build up emergency funds for the rainy days, such as in the event of job loss or hospitalisation. In addition, with interest rates on the rise, home owners who default on their mortgage payments could have their homes repossessed by the bank. Thus, it is better to prepare ahead than to cry over spilled milk much later.
We are sure that with proper planning, every aspiring homeowner will be able to bag their home of dreams. With careful financial planning, your dream home should still be within your reach so always plan ahead and be prudent.
And alas, if you find yourself stuck in a rut even after weighing all possible options, you may need a professional’s opinion. In this case, schedule a visit with us or book a free consultation with our trusted and renowned representatives.
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