It’s no secret that properties in Singapore, whether it’s an HDB flat or condo, tend to have higher prices when they’re located near an MRT station. We’ve previously looked at the price psf of condos near MRT stations, as well as the price changes of condos and HDB flats near MRT stations between Q1 and...
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Whether you are a first-time buyer or a seasoned property investor, the initial cash outlay is always one of the foremost concerns when purchasing a property in the world’s second most expensive city, Singapore. Therefore, many people are probably thinking of ways to minimise the downpayment of a dream home, such as taking up a mortgage, as property prices can be extremely high.
This is especially true in scenarios where one fails to meet the Total Debt Servicing Ratio (TDSR) and is looking at alternative ways to increase their borrowing capacity. In such cases, pledging your asset can be a handy option to augment your income and increase your borrowings, bringing you a step closer to your dream home.
But even when pledging your assets, there are different ways to go about it too. In this article, we sought the expertise of PropertyGuru Finance mortgage experts Ethan Ng and Ben Goh to learn more about the role of asset pledging in home loans, with a specific focus on unpledged assets.
Essentially, the main point of pledging an asset is to boost your borrowing capacity so that you can minimise the upfront downpayment by borrowing a larger amount to finance your dream property. There are four kinds of assets that you can pledge to qualify for home loans:
|
|
Example |
|
Eligible financial assets |
Cash deposits, bonds, unit trusts, listed company shares |
|
Liquid assets |
Un-encumbered funds to draw on in a short period of time |
|
Pledged assets |
Cash must be deposited in a fixed deposit with the mortgage lender for 48 months (from the start of the loan) |
|
Unpledged assets |
Cash deposits that do not have to be placed with the mortgage lender for 48 months |
Particularly after the latest property cooling measures were announced in December 2021, and with the TDSR further reduced to 55%, you may find yourself experiencing some difficulties when trying to meet the TDSR limit.
You may calculate your TDSR based on the formula below:
TDSR = (Total monthly debt obligations* / gross monthly income**) x 100%
*Monthly debt obligations to be included:
**Before tax and excluding any CPF contributions made by the employer.
As Ethan shares, some find that their “income may not be sufficient to take up a loan at times. However, with assets such as liquid cash, stocks, and equities on hand, you would be able to present these assets to the bank to obtain a higher loan amount”. In this case, asset pledging is beneficial as they are computed as a source of ‘additional’ income for you to meet the 55% TDSR criteria.
A haircut refers to a ‘discount’ in the value of your assets and can range from 0% to 70%, depending on the tenure of your pledging. For example, if you pledge your liquid assets with the bank for a minimum of four years, it is recognised at 100% of its value with no haircut, provided the bank is financing your property.
On the other hand, if you pledge your assets for less than four years or opt for unpledged assets, you will incur a hefty 70% haircut on your asset value! The following table summarises the types of eligible assets and their respective haircuts:
|
Eligible financial assets |
Pledged for a minimum of 4 years |
Pledged for less than 4 years or unpledged |
|
Liquid assets (e.g. Singapore dollars and coins, including deposits)
|
Minimum 0% haircut |
Minimum 70% haircut
|
|
Other financial assets:
|
Minimum 30% haircut |
Minimum 70% haircut |
Source: Monetary Authority of Singapore
However, do keep in mind that not all banks accept asset pledging, with some preferring conventional downpayments and income. So, remember to check with your bank to avoid any late surprises!
At first glance, unpledged assets may seem more advantageous than pledged assets, given the flexibility of cash flow without locking in your deposits for 48 months. This may be an option if you have plans to use the funds in the near future and cannot commit for the duration. As Ben shares, “individuals can explore the option of unpledged assets if they have available cash in hand”. This flexibility will afford you more room to plan for your other financial commitments and obligations!
However, the trade-off for this financial flexibility is that unpledged assets will only constitute up to 30% of ‘additional’ income compared to pledged assets, meaning that your monthly gross income will see a meagre growth compared to pledging it with your lender.
Additionally, while unpledged assets “do not require a lock-in of funds, banks would generally ask to see the funds twice: during the loan application, and before loan disbursement,” mentions Ethan.
Let us look at the formulas for converting pledged and unpledged assets to income.
Pledged assets:
Monthly gross income derived from asset = Asset Value / 48
Hence, if you decide to pledge $20,000 in assets with a bank for four years, no haircut is applied, so its full value will be recognised when computing your income, which translates to an additional $416 per month, that can be used to meet the 55% TDSR criteria.
For unpledged assets, the formula is as follows:
Monthly gross income derived from asset = (Asset Value x 30%) / 48
For the same $20,000 deposit, your monthly income will be increased by only $125 because of the 30% haircut.
Here, we have an example to see the different amounts needed for pledged and unpledged assets in the event an applicant fail to meet the TDSR:
Say you are jointly purchasing a private property with your spouse, and drawing a fixed monthly salary of $3,000, with a personal loan of $500 per month. Your spouse earns a fixed monthly salary of $9,000 and has a car loan of $1,200 per month. Both of you are taking up a 75% loan for your first property of $2,000,000, with a monthly instalment of $7,329.
TDSR = ($500 + $1,200 + $7,329 / $3,000 + $9,000) x 100%
= ($9,029 / $12,000) x 100%
= 75%
As your TDSR exceeds the 55% threshold, you are not eligible to borrow that amount unless you do something.
However, if you and your spouse decide to pledge cash with the bank to qualify for the home loan, the amount of money you will need to pledge can be calculated by reducing the TDSR percentage from 75% to 55%.
Income required to pass TDSR = $9,029 / 0.55
= $16,416
Income shortfall = $16,416 – $12,000
= $4,416
Cash (pledged) = $4,416 x 48
= $211,968
Therefore, you and your spouse would need to pledge a minimum of $211,968 to qualify for the mortgage loan. While, the unpledged method will amount to $706,560 ($211,968 / 0.3) and have to be shown to the bank twice, as mentioned earlier.
Although not pledging your deposits may permit greater flexibility in deploying your funds in the near future, it will have little help on your home loan application. This is because the calculation for unpledged deposits only recognises up to 30% of its value, which will result in a marginal increase.
When it comes to securing your ideal home loan, the various restrictions and limits can be perplexing. Depending on the TDSR, your financial obligations like your debts and personal income will determine whether you may need to tap on your assets (pledged or unpledged) to augment your borrowing capacity.
If you manage to pay off and reduce the size of your debts or increase your income, you would be able to qualify for the TDSR, having no need to use your assets to augment your income.
But should you decide to tap into your assets to boost your financial standings to qualify for a larger loan, you can choose to pledge your assets or trade that off for more financial flexibility but at a lower borrowing quantum.
Ultimately, the case of pledging or not pledging and the type of assets used in obtaining your home loan is up to you. As Ben also points out, this “depends largely on the cash liquidity of individuals as every situation is different.” However, if you’re still feeling a little confused at this point, fret not, as our friendly PropertyGuru Finance Mortgage Experts are here to offer you their relevant expertise and input.
Still unsure of whether to refinance, or which refinancing plan suits you best? Click here to get connected with one of our PropertyGuru Finance mortgage experts today!
Want to save more on your home loan? Compare the best mortgage rates on PropertyGuru Finance, or contact us for more personalised advice and recommendations:
Pledged or unpledged assets can be used to secure a higher loan, but the amount depends on the asset type and method of pledging.
In reality, this would not be possible since you are expected to show your lender the funds twice during the loan application stage and before loan disbursement.
Generally speaking, no. But it is best to check with your lender, as each loan may vary.
People who choose unpledged assets may want to invest them in stocks or bonds, or may not need the cash now but will have use for it in the future.
Because not all asset classes are accepted, you may need to show something else to the bank when applying for a home loan.
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In a country with steep property prices like Singapore — the world’s second most expensive city to live. A home loan is probably one of the most important decisions you will make since it is going to help you make a big-ticket purchase financially.
With the plethora of easily accessible and free information online, some people may feel that professional advice is unnecessary when choosing a home loan as they can obtain the instruction on their own. However, others may differ as they think that expert advice is needed to help them ease the entire process.
Furthermore, different types of home loans are available depending on the property you wish to acquire. For instance, if you’ve made up your mind to buy a flat, you have the option to go for either an HDB Concessionary loan or a bank loan. But if you're considering an executive condominium (EC) or private property, you have no choice but to apply for a bank loan.
In this article, we will discuss the pros and cons of obtaining professional advice when selecting the ideal home loan for you.
Both do-it-yourself (DIY) research and seeking professional advice have their advantages and pitfalls when selecting a home loan. First, take DIY research — you might find it the more pocket-friendly option with free information readily available online. Also, it’s convenient and fast, permitting you access without having to leave the comfort of your home (or phone).
However, the pitfalls include the accuracy of information online, which may become outdated and thus unreliable, given the ever-changing rules and measures of the property market. Since regulations constantly change based on market conditions, it's sometimes difficult to get the most up to date information about property and loans online compared to an advisor.
In addition, DIY research may often yield generalised results for the public and may not be most suitable for your individual needs.
If you are inexperienced in property and mortgages, the sea of information out there may just overwhelm you. Therefore, getting professional advice would be helpful in giving you a better perspective on your current finances, helping you decide what you can purchase comfortably and providing the ideal type of loan option available.
Expert advice: PropertyGuru Finance’s Mortgage Affordability Calculator provide you with a quick estimate on the property you can afford according to your loan eligibility!
With the right advice from experienced advisors, you’ll be armed with the knowledge to plan for future property purchases and investments. For instance, you’ll be able to make better financial judgements on when to refinance, sell, upgrade, or right-size your property.
This is because a layperson may find home loans a little confusing as the amount of money he can borrow is determined by up to four factors: salary, property valuation, Loan-to-Value (LTV) limit, Mortgage Servicing Ratio (MSR), and Total Debt Servicing Ratio (TDSR).
For instance, the new maximum LTV ratio for bank loans is capped at 75%, with 20% to be paid using a combination of cash or CPF Ordinary Account (OA) savings and the remaining 5% paid in cash only.
Also, the MSR ratio is now capped at 30% (applicable only to HDB and EC purchases), while the TDSR has been reduced to 55% after the latest round of cooling measures in December 2021.
This means that a higher downpayment of 5% upfront and reported income is required to qualify for the same amount of loan when buying a property after December 2021. Therefore, getting clear advice would be beneficial when selecting your next home loan as your advisor would ensure that you are kept updated on all the new changes and avoid any miscalculation.
An experienced mortgage advisor can offer you the right advice, help you mitigate the confusion and fuss over the paperwork and assist you in collecting the documentation required for the home loan application.
For example, if you are unaware of whether you should apply for an In-Principle Approval (IPA) first or if your IPA is still valid following the recent property cooling measures announced in December 2021. While new changes may cause some confusion, obtaining the right advice can help ease anxieties since banks would also have to recalculate the debt obligations and repayments for all new applications due to the reduction limits. In this case, a mortgage advisor would be able to provide advice and assist you with the necessary paperwork in order to reapply for the IPA.
Hence, with the requirements for different types of properties changing every few years, having sound and the latest advice would be helpful in realising your next dream home.
Compared to the more straightforward new purchase loan application, refinancing and repricing of home loans may be an unfamiliar concept to some home buyers. With so many options available from different banks and financial institutions (FI), figuring out which package works best for you can be a daunting task.
When looking to invest or generate passive income from a property, there may be requirements and regulations you are unsure. Getting appropriate advice would be immensely helpful in assisting with your decision-making and other potential investment plans.
It is evident from the above that seeking professional advice is beneficial, or even necessary, for gaining greater clarity about your financial health. However, sometimes you may find that such advice is not necessary.
With our experienced PropertyGuru Finance Mortgage Experts, who are kept well updated with industry knowledge and experience from working with various banks, you might find their advice beneficial in helping you choose your next home loan. However, you might also feel that the following situations would make obtaining advice less helpful.
Suppose you already have a solid finance background and a clear outlook of your current financial situation. In this case, expert advice may not be as helpful since you already know which home loan to opt for your property.
In addition, if you monitor property trends and have a sense of the best time to invest, outside advice may also not fully capture and reflect your personal investment views and objectives.
The fact that our Mortgage Experts are not limited to a single bank, nor do they charge you a fee, allows them to provide objective and unbiased advice on a variety of home loan packages available at different banks. This contrasts with a banker who works for a particular organisation and may not be able to provide you with a holistic advice on other packages available elsewhere which might be more suitable for you.
We believe this is ultimately up to you since everyone comes from different financial backgrounds and have differing requirements. As both options have multiple benefits and drawbacks, it is ultimately your decision to make. However, be sure to understand all the terms and conditions, documentation, and paperwork needed before putting pen to paper.
Still unsure of what to do, you can always rely on PropertyGuru Finance as a useful and reliable source of objective and unbiased mortgage advice. The best part? Our services are complimentary and come at no cost! No matter what you decide, our friendly and approachable PropertyGuru Finance Mortgage Experts are always here to assist you!
Want to save more on your home loan? Compare the best mortgage rates on PropertyGuru Finance, or contact us for more personalised advice and recommendations:
Most people would either apply directly to their bank or get mortgage advice from a mortgage advisor.
A mortgage advisor could help you save time and money by guiding you through the process and suggesting the best loan for your specific needs.
To ensure that you are getting sound advice from a professional, you should learn about your advisor's credentials, access to banks or financial institutions, and level of experience.
Information may vary based on the individual, but most will receive advice on their eligibility for a loan, competitive rates, and assistance with their application process.
When negotiating with your bank fails, you can speak with a mortgage advisor who will try to match you with a bank that may be more comfortable accepting your loan.