Affordable housing is a big ticket issue right now. And when our government tackles a problem, they do it with a uniquely Singaporean slant: That is, the unshakeable conviction that anything worth doing is worth overdoing. Enter the latest HDB Cooling Measures:
What are the Latest HDB Cooling Measures?
- Reduction of the Mortgage Servicing Ratio (MSR) from 35% to 30% for HDB Concessionary Loans
- Reduction of the maximum loan tenure from 30 to 25 years for HDB flats; and 35 to 30 years for bank loans.
- 3 year increased wait time for Permanent Residents (PRs)
Here’s a quickie explanation:
1. Reduction of the MSR to 30%
The MSR measures the percentage of your income that would go toward repaying your home loan monthly.
In the past, HDB buyers had a MSR of 35%. So if you had an income of $2,500, your MSR would have been (35% of $2,500) = $875.
That means the maximum allowable repayment on your home loan, every month, would have been $875. The loan amount granted to you will be calculated based on this amount.
With the MSR now lowered to 30%, your maximum allowable repayment (again on a $2,500 income) would be a paltry $750. Which means the loan amount granted to you will be reduced accordingly. Yeah, you may have to shelve those upgrading plans for now.
Incidentally, the MSR for HDB Concessionary Loans are now similar to bank loans: Both are at 30%.
If the new MSR just wrecked your home loan approval, contact MoneySmart for help. The mortgage specialists there can figure something out. It’s free, so long as we keep shoving them stale bread under the cellar door.
2. Reduction of Maximum Loan Tenure
The maximum loan tenure* is now set to 25 years for HDB Concessionary Loans and 30 years for bank loans.
*The time before a loan is repaid in full
A 30 year loan tenure with a bank loan will however only grant you 60% of the purchase price. If you need the full 80%, the maximum loan tenure you can take is 25 years, which is the same as the HDB Concessionary Loan.
A shorter loan tenure means higher monthly repayments for the same loan amount. Combined with the lower MSR, this means home buyers in general will be borrowing much less.
Follow us on Facebook, and we’ll address how the HDB and bank loans compare under the new ruling.
While that sucks, it does mean fewer Singaporeans will be over-leveraged. This should brace us for potential liquidity crunches, once the Americans change their fiscal policy.
3. Increased Wait Time for PRs
This is perhaps the biggest, most significant change. Previously, someone could buy a resale flat as soon as they got their PR status. It was a major contributor to rising resale flat prices, and sudden paranoid xenophobia. Now, a 3-year waiting period has been implemented.
The new restriction means some PRs will now have to rent (unless they can afford other private property). That’s good news for landlords, and for flat owners who have started letting out rooms.
If you have a sizeable 4-room or 5-room, now may be the time to keep an eye on the rental market.
A Message to Property Investors?
Resale flat prices were already plummeting, even before this cooling measure. Just yesterday (26th August 2013) we heard that zero COV flat sales tripled, from 14 in January to 49 in July.
(A zero CoV sale means the seller was only paid the actual valuation of the flat).
The new cooling measure makes it worse. Expect the resale market to contract, like a well salted slug, because PRs made up a significant part of the market. Now the new arrivals won’t be able to buy for three years, even if they had the cash.
The message to property developers is clear:
HDB flats are for housing first, and investment second.
The government isn’t going to temper its policies to cushion investors, so don’t count on resale flats prices hitting the dizzying heights they did a few years back.
A Final Word
Factoring in these slight changes to home buying could have a significant impact on your financial planning. Needless to say, it’s just that much more complicated to figure out whether or not you can afford a house. Sure, you could get an In-principle Approval (IPA) from the banks, but that takes tons of paperwork and you’re going to have to wait 3-4 weeks for an answer. Not exactly very comforting.
If you need an answer soon in order to make a better and more confident home buying decision, MoneySmart has just developed a new Loan Affordability Calculator that factors in all these new changes so you don’t need to sweat over it. Get answers and understand how these new regulations affect your home financing in as short as 5 minutes. The peace of mind is worth it.
How do you think these cooling measures will affect the property landscape in Singapore? Leave us a comment here!