How the Recent Property Cooling Measures Will Affect You as a Potential Homeowner
In a joint press release between MAS, MND and HDB, the Singapore government has announced new cooling measures for the property market that have taken into effect as of 30 September 2022. This second round of cooling measures follows the measures previously implemented in December 2021 as the Singapore property market remains red-hot. The main goal of this round of cooling measures is to dampen borrowing by home buyers and control demand from private property owners.
Why Is There a Need for Cooling Measures?
Property markets around the world have seen record prices on the back of government COVID-19 stimulus initiatives and low interest rates. Singapore has been no exception.
Since implementing the last round of cooling measures, the HDB resale Price Index has increased by over 5% as of the end of Q2 2022. Prior to 2012, paying over S$1 million for an HDB resale flats was unthinkable. Yet, between May to August 2022, an average of one HDB resale flat was transacted at S$1 million or more a day. This signals that there is still a strong demand for housing despite the high prices. The Singapore government hopes that the additional cooling measures will soften the HDB market to keep prices affordable.
Property Terms You Need to Know
Before breaking down the new cooling measures, here’s a crash course on some common property jargon.
Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) ratio represents the ratio of a housing loan to the value of the property. The current LTV ratio for private property loans is 75%. This means that homebuyers are able to finance up to 75% of the purchase via a housing loan and have to place a downpayment of 25%.
Total Debt Servicing Ratio (TDSR)
The Total Debt Servicing Ratio (TDSR) refers to the portion of a borrower's gross monthly income that goes towards repaying the monthly debt obligations, including the loan being applied for. It applies to all outstanding loans, including car loans, personal loans, student loans and even credit card debt.
Under the current framework, the TDSR limit is 55%. This means that if you earn a monthly income of S$3000, your monthly loan repayment for all your loans combined cannot exceed S$1,650. A big driver for implementing the TDSR is to prevent home buyers from being over-leveraged and taking out unsustainable loans to purchase property.
Mortgage Servicing Ratio
The Mortgage Servicing Ratio (MSR) refers to the portion of a borrower’s gross monthly income that goes towards repaying all monthly property loan repayments, including the loan that is being applied for.
The MSR is relevant to property loans taken out to purchase an HDB flat, both when financed by a private financial institution or by HDB themselves. There is no MSR for private housing.
The current limit for the MSR is 30%. This means that if you earn a monthly income of S$3000, your monthly property loan repayments cannot exceed S$900.
What Are the New Measures?
Now that we have clarified a few key terms, what exactly were the new measures that have been implemented?
The LTV ratio for HDB housing loans has been lowered from 85% to 80%. This means that under the new cooling measures, home buyers who take up an HDB housing loan have to place a minimum downpayment of 20% of the value of the house and be able to finance the remaining 80%.
The medium-term interest rate floor used by private financial institutions to compute a borrower’s Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) has been raised by 0.5%. The revision in interest rates is meant to reflect the current rising interest rate environment.
The new interest rates are as follows:
| Type of Loan | Medium-Term Interest Rate |
|---|---|
| Residential Property purchase loans and mortgage equity withdrawal loans | The higher of a 4% per annum (p.a.) floor (up from 3.5% p.a.) or the thereafter interest rate |
| Non-residential property purchase loans and mortgage equity withdrawal loans | The higher of a 5% per annum (p.a.) floor (up from 4.5% p.a.) or the thereafter interest rate |
| Source: Ministry of National Development |
The interest rate used serves as a form of a stress test for a borrower’s ability to repay their loans. This means that borrowers looking to finance a residential property must still be able to maintain a TDSR of 55% and an MSR of 30% even if interest rates rise to 4%. The actual interest rate charged for mortgages will remain at the discretion of private financial institutions.
Parallel to this, HDB has introduced an interest rate floor of 3% for computing the eligible loan amount on housing loans granted by HDB. This does not affect the actual HDB concessionary interest rate, set to remain at 2.6%.
- Private property owners now have to wait 15 months after selling their private property to be eligible to buy a resale HDB flat. This is in contrast to the previous measures where private property owners were able to buy HDB resale flats on the open market provided they sold their private property within six months of purchasing the resale HDB flat. This temporary measure is done to manage the demand stemming from cash-rich private property owners.
How Does This Affect You?
For homebuyers, there will now be a greater upfront cost to buy an HDB flat. With the lower LTV ratio for HDB housing loans, you will be required to place a greater down payment when buying an apartment.
For example, the median price of a four-bedroom resale HDB in Punggol in Q2 2022 was S$550,000. Previously, a minimum downpayment of S$82,500 would suffice for an HDB loan. With the drop in LTV from 85% to 80%, you would now have to place a minimum downpayment of S$110,000, a S$27,500 difference for the same property. While the CPF ordinary account can be used to finance the downpayment, this still marks a sizeable difference in upfront cost.
Furthermore, the increase in the medium-term interest rate floor to 4% is likely to result in smaller property loans being granted to ensure that borrowers are able to maintain TDSR and MSR at the required levels despite higher interest rates. This could again translate to a greater upfront cost as you would have to place a greater downpayment to afford the same property. Alternatively, you might have to consider buying a smaller or less expensive property with less available financing.
As a current private property owner, you would be unable to buy an HDB resale flat for 15 months after selling your current private property. This means that you would have to find an interim housing solution during the 15 months between selling your private property and being eligible to buy a resale HDB flat.
It is important to note that the wait-out period does not apply to seniors aged 55 and above who are downgrading from a private property to a four-room or smaller resale flat. The wait-out period has also been waived for private property owners who have documentation proof that they have obtained an option to purchase an HDB resale flat before the regulation change on the 30 September 2022.
That being said, the new measures are not all doom and gloom. Owners of rental properties potentially stand to benefit from the new rules. As private property owners are forced to adhere to the 15-month wait-out period, this could translate to more people looking to rent in the short term. Between the wait-out period and any potential renovation projects after buying a resale HDB, rental property owners could be looking at an uptick of potential renters looking for 12- to 24-month rental contracts.
Conclusion
The new cooling measures are an initiative by the Singapore government to tame the rapid rise in housing costs. Their main strategy is to reduce homebuyers’ ability to finance purchases through property loans, with the hopes that this would translate to more conservative action from homebuyers. Even so, it may take a while before we see measurable differences in property prices.
Further Reading
Enya is a budding Research Analyst at ValueChampion. She has a BA in Economics from the University of Melbourne and has previously worked in the banking sector. Enya combines her experience and passion for personal finance to bring digestible and enriching financial content to readers.