The latest measures by MAS could be seen as ways to control consumer spending on big ticket items, like properties and cars. The Jan 2013 property cooling measures reduces the loan limits substantially for second and more properties purchases. And last week measure is to cap the car loan limit at up to 60%, down from 100% previously, whilst the loan tenor is halved to 5 years. MAS has limited purchase of properties and cars to those who have the ability to pay for the upfront payment and at the same time reduce the risks of over borrowing.
How would these latest changes affect would-be home buyers? Is it getting tougher for home buyers to secure a housing loan?
One of the measures introduced in the Jan 2013 measures, and for the first time, is the Mortgage Servicing Ratio (MSR). Home buyers, who are purchasing a HDB flat, will have to meet the MSR requirement when applying for a housing loan from banks. The MSR requirement states that the monthly payment on housing loan should not exceed 30% of monthly income. (Currently, MSR requirement applies to HDB flat buyers getting a bank loan, and not applicable to private residential property buyers).
In addition, banks will also assess the overall debt servicing ability of the borrower by taking into account the borrower's monthly payments towards car loan, renovation loan, personal loan, credit card loan, etc. Note that the debt service ratio calculation varies from banks to banks. Generally, the debt service ratio should not exceed 35% of monthly income.
Let's take a look at an example. For a home buyer applying for a 30-year $500K loan, the instalment will work out to be about $1,600 at 1.1% interest rate. Based on the 30% MSR requirement, the monthly income must be at least $5,333. In addition, the other liabilities should not exceed $266 per month in order to meet the overall debt servicing ratio of 35%.
For a $1 million housing loan, the instalment will work to be about $3,200. At MSR of 30%, the income should be at least $10,666. And the other liabilities should not exceed $533 per month if based on 35% debt servicing ratio.
From the above examples, we can see that if there is an existing car loan, the chance of getting the required housing loan amount may not be high, and the home buyer may have to settle with a lower loan amount for the house. It would also mean that the buyer could have over committed and may have to look for a property that is within his/her means.
Note that the above housing loan instalment is calculated based on current interest rate at 1.1%. However, banks generally take a higher interest rate for the calculation MSR, which means the instalment would be much higher.
With the tightening of loan limits and credit policies, home buyers would have to plan and do their sums before committing to buy a property. This is to help ensure that we do not commit to a property and later realise that the the housing loan cannot be approved. A safer way is to apply for an in-principle approval from banks before committing to the purchase.
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