If you’ve been keeping up with the news, you would have heard about the recently-announced (and very promptly implemented) property cooling measures effective 16 December 2021. If you’re a home buyer, your first instinct is probably to pump brakes and find out how the new property curbs affect your upcoming property purchase.
For first-time buyers taking a bank loan, the rule that affects you most is the reduction in the Total Debt Servicing Ratio (TDSR) from 60% to 55%. This ratio essentially limits the total debt (including home loans, car loans, and even credit card debts) that you can service in a month based on your gross monthly income. Previously, you could take loans with monthly repayments totalling up to 60% of your monthly income. However, the latest cooling measures now lower that ratio to 55% of your monthly income.
Why Is the TDSR Limit More Stringent Now?
The likely trigger of the cooling measures in general is the increase in million-dollar HDB transactions, with a whopping total of 261 such flats transacted in 2021. Singularly, a lower TDSR helps to reduce household debt, which has risen amid COVID-19.
So, what does the lower TDSR limit mean for prospective homeowners looking to finance their new homes?
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New TDSR Limit of 55%: Are You Affected?
If you’ve been issued your Option-to-Purchase (OTP) before 16 December 2021, rest assured that you are not affected by this change to the TDSR. The lower limit also does not affect those whose refinanced loans were granted before 16 December 2021, or those who are refinancing owner-occupied housing loans (i.e., if you are living in the property).
However, if none of the above apply to you, you’ll have to start reframing your house buying plans with the new 55% TDSR limit in mind. Here are some buyers who may be affected.
1. First-time Home Buyers
If you are a first-time home buyer looking to buy a home but have not committed to a purchase before 16 December 2021, the new TDSR will apply to you. To help illustrate the implications, here’s an example:
Say, you and your spouse have a gross monthly household income of $6,000. Under the previous TDSR limits, you would have been able to service loans and debts totalling $3,600 in monthly repayments. However, with the reduced 55% limit, your monthly serviceable debt is now $300 less at $3,300.
|
|
Up to 15 Dec 2021 |
From 16 Dec 2021 |
|
Gross Monthly Income |
$6,000 |
$6,000 |
|
Total Debt Service Ratio (TDSR) |
60% |
55% |
|
Monthly Serviceable Debt |
$3,600 |
$3,300 |
If you were intending to buy a private property and to utilise the full TDSR to service a large home loan, then you will not be able to borrow as much as you had expected anymore.
However, if you’re buying an HDB flat, this change is unlikely to affect you because an even more stringent Mortgage Servicing Ratio (30% of your monthly income) already applies. For an income of $6,000, your monthly mortgage repayments will be capped at up to $1,800 unless you have other debts that eat into your TDSR. In that case, the TDSR may limit how much you can borrow.
|
|
Up to 15 Dec 2021 |
From 16 Dec 2021 |
|
Gross Monthly Income |
$6,000 |
$6,000 |
|
Total Debt Service Ratio (TDSR) |
60% (up to $3,600) |
55% (up to $3,300) |
|
Mortgage Servicing Ratio (MSR) |
30% (up to $1,800) |
30% (up to $1,800) |
|
(If Applicable) Existing Monthly Debt |
$1,600 |
$1,600 |
|
Maximum Mortgage Monthly Repayment |
$1,800 (limited by MSR) |
$1,700 (limited by TDSR) |
Do note, however, that if you want to take a loan from HDB, then there are new Loan-to-Value (LTV) limits for that as well. It has been reduced from 90% to 85%.
2. Second-time Home Buyers and Investors
For second-time home buyers (who have not committed to a purchase before 16 December 2021), the situation is similar compared to first-time buyers.
There are two groups of second-time buyers: those selling their property to buy another, and those buying their second property (without selling their existing one).
For the first group (selling existing property to buy a new property), the situation is similar to the above example. This is because you will only be servicing one mortgage at a time.
For the second group (investors buying second or subsequent properties), if you intend to service multiple mortgages at once, then the tighter TDSR limits will be even harsher on you. The mortgages for both your properties will be added to the 55% TDSR.
Do take note that the new cooling measures have also raised the ABSD rates which will affect investors as well.
3. Homeowners Refinancing Investment Properties
As mentioned earlier, if you’re refinancing your home loan for the property that you live in (i.e., owner-occupied), the new TDSR rules do not apply to you. However, if you own multiple properties and intend to refinance a home loan for a property that you’ve rented out or do not stay in, then the TDSR will apply to you.
For example, you bought a home with your spouse 10 years ago and continue to stay there.
Five years ago, you also bought another property for investment. You now rent out that property for income.
Now that interest rates are low, you’re thinking of refinancing to save money on interest. If you refinance the loan for the property that you and your family are living in, the TDSR does not affect you. If you need help refinancing, our PropertyGuru Finance mortgage specialists are happy to help at zero cost.
But if you refinance for the loan for the property that you’re renting out, you must keep within the tightened TDSR limits of 55%.
3 Tips for Keeping Within the 55% TDSR
While the TDSR stipulates the maximum loans and debt you can service, it is rarely ideal to stretch yourself to the limit. If you’re buying a new property, it may be best to adjust your budget and pick one with a more manageable financial commitment.
To help work out your budget, use our Affordability Calculator (read our top tips here).
That said, maximising your TDSR sometimes can’t be helped, especially if you have a large or growing family to care for. In such cases, how does one keep within the now-lower TDSR then?
For starters, you can opt for lower monthly repayments compared to before. This can be done in two ways; you could either apply for a smaller loan, or extend your loan tenure if you aren’t already at the maximum tenure. Either of these options will change how you finance your property, and forward planning will be required.
Loaning less from HDB or the bank will mean that a larger downpayment. Hence, this is only as feasible as long as you can afford the amount that needs to be paid upfront.
If paying more in downpayment is not feasible for you, you can also consider opting for a longer loan period. For HDB loans, the maximum loan tenure is 25 years while that of banks is 35 years. You can also refinance to extend your loan tenure.
By stretching out your loan across a longer period, you can enjoy lower monthly repayments, which will come in handy especially if you are financing loans for other big-ticket items such as a car, renovations, or even education loans. However, longer loan periods also mean that you may end up paying more in total interest over the years.
That said, this can be worked around by regularly refinancing your loans so that you’re not stuck paying high interest rates.
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Tip: Check out the PropertyGuru Finance SmartRefi tool, which monitors the market and automatically alerts you as soon as there are new mortgage packages with more competitive rates to help you maximise savings!
Tighter TDSR Under New Cooling Measures: Should You be Panicking?
The short answer is, no, there is no need to panic. Depending on your situation, the lower TDSR at 55% is not necessarily a bad thing. Sure, you may need to reassess your home buying plans, which may see you postponing them or lowering your budget, but the intention is ultimately to protect you.
The TDSR will help ensure that you are spending within your means, which can help prevent undesirable outcomes like being unable to pay back your mortgage in a timely fashion or having to give up your current property.
Have More Questions on How the Cooling Measures Affect You?
Whatever your circumstances, our mortgage specialists are on hand and ready to offer personalised advice and recommendations should you need help with your home loan, refinancing, and more!
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