You know, when more than 80% of Singapore’s population lives in some kind of HDB flat, you would expect that everyone who applied for one would get one. But for the past few years, it seems, about 3% or about 2000 applicants have had to give up their new flats because of financial difficulties. But that number goes up once you factor in other reasons.
Here are the top 4 reasons why people cancel their HDB flat applications:
1. Unable to get a big enough loan
If you’ve been following MoneySmart for over a year, you’ve definitely heard us talk about the Mortgage Servicing Ratio (MSR) and the Total Debt Servicing Ratio (TDSR). Essentially, these are measures designed to prevent you from borrowing too much from the bank when buying your house.
On the one hand, it’s a very important measure introduced by HDB. By encouraging people to spend within their means and not overextend themselves, you’re preventing people from buying homes that they cannot afford. On the other hand, it really puts you in a spot when you’re trying to get a loan.
The TDSR is set at 60% of your income. What it means is that the total of all your loans cannot be more than 60% of your income. So if you have student loans, car loans, personal loans or worse, credit card debt, you will have problems borrowing enough for your home loan. What happens with some hopeful HDB flat applicants is that they take out a car loan or student loan BEFORE applying for their home loan. This immediately reduces how big a home loan they’re eligible for.
But if you think the TDSR is the main cause of people cancelling their flat applications, it’s actually not. What causes more problems for people is, surprisingly, the MSR.
The MSR is currently set at 30% of your gross monthly income. Say you only earn $2,500 a month (before CPF), your mortgage will be capped at $750 a month. Since your loan tenure is up till you turn 65 (capped at 25 years), that means the maximum loan you’re eligible for is only about $150,000.
If your flat costs more than that (spoiler alert: It probably will), you’ll have to scramble to come up with the difference using cash or CPF. More than likely, you might end up cancelling your HDB flat application.
2. Bad credit rating
We’ve said it many times before but it’s worth repeating one more time: buying a home is probably the biggest purchase you’ll ever make in your life. So you can be sure that banks and other financial institutions are extra cautious when lending you that huge sum of money to buy your dream home.
What these financial institutions do is check your history with repaying your debt. So they may look at things like how consistently you pay off your car loan or student loan. Most of the time, though, it’s your credit card usage that will determine how much a bank is willing to loan you.
For example, if you are not paying your credit card bills in full and on time, it implies that you might have financial difficulties or cashflow issues. Sure, you can argue, it was only a small sum, no more than a hundred dollars! If you have problems paying back “no more than a hundred dollars”, how do you expect the bank to trust you to pay back hundreds of dollars in mortgage repayments?
But what if bad credit card usage is only something you did in the past! Say it was ten years ago, when you were young and immature. Since then, you’ve learnt your lesson, cut up all your credit cards and never used them ever again. Let me just put it like this, to the bank, all they know about you is that whenever you borrowed money, you had trouble. The only way the bank can tell if you’ve become more financially responsible is if your recent credit card payment behaviour is good. And by “recent”, I mean for at least two to three years.
So if you’re planning to get a home loan, remember to prove that you’re financially responsible by keeping your credit card accounts in shape. Always make payments in full, where possible, and at least pay it on time.
3. Breaking up before collecting keys
The running joke is that the way to propose in Singapore is to ask “Eh, you want to go apply for HDB together?” Well, it’s kinda true. Marriage in Singapore can sometimes be a result of convenience, of wanting to get a house together. The best part is, you only need to produce your marriage certificate when you collect your keys together.
The only problem? If you’re buying a new flat, you may have to wait about 3 years before it’s ready. So some people actually apply for the flat a little too early in the relationship. Like, before they’ve even had a chance to actually have a discussion with one another about married life. After all, what’s the rush, right? 3 years is a long time.
Except when neither party has made a real commitment to one another, the stress of the financial commitment of a house can actually have detrimental results. After all, if the relationship sours, then you’re caught between losing between $10,000 and $30,000 when pulling out of your BTO flat application, or proceeding with what is probably an unhappy marriage. Neither of which sounds very appealing.
What’s worse, after you’ve applied for a flat under HDB’s Fiance/Fiancee Scheme, you are not allowed to replace the name of your former partner with someone new. You won’t even be allowed to replace the ex’s name with that of your parents! Not even if consent has been given by your ex.
There’s nothing much left you can do, except to cancel the flat application.
4. Unforeseen circumstances
Other than the three mentioned above, there are several other possibilities that could cause you to cancel your HDB flat application. Getting let go by your company, coming down with a serious illness, or any other kind of problem that would create problems with your cashflow. Each of them alone might cause you to be unable to meet the monthly repayment of your loan, and thus it might be better to not to continue with your HDB flat purchase.
Or it could even be a policy change from the government. Like the TDSR we mentioned earlier, the introduction of income-weighted average age to determine loan tenure in 2013 made it harder for people who were older to get a longer tenure. It’s anyone’s guess what cooling measures might be introduced next. Either way, hope that you’re not affected when any new policies are introduced.
What other horror stories have you heard about people cancelling their HDB flat applications? Share them with us.