On 29 September 2022, Singapore’s government introduced a new round of cooling measures to deal with housing demand and encourage property buyers to be more prudent in home loans amid rising interest rates. The new cooling measures announced on 29 September 2022 involved tightening of loan quantum for both the private and public housing segments. A wait-out period of 15 months is also introduced to the private residential owners who intend to buy a non-subsidised HDB resale flat after they sell their private home (Previously, there is no wait-out period for a private home owner to buy a non-subsidised HDB resale flat after they sell their private residential unit).
With the interest rate set to climb higher, new measures are expected from our government to encourage more prudent housing loan borrowing for our property purchases. The rising of medium-term interest rate floor to 4% p.a from previously 3.5% p.a is expected to have some knee-jerk impact on private home sales in the coming months, as potential buyers have to review their budgets to ensure the 0.5% point increase in the medium-term interest rate does not affect their required home loan amount.
EC buyers might face tougher restraints as they are also subjected to a Mortgage Servicing Ratio (MSR) of 30% as compared to private home buyers who are only subjected to a Total Debt Servicing Ratio (TDSR) of 55%.
Medium-Term Interest Rate of 4% – Private Residential.
A family with a household income of $16,000 per month, the maximum home loan will only be about $1.667 million (based on a loan tenure of 25 years, LTV of 75%, and no debt obligations) using a medium-term interest rate of 4%, compared to a maximum home loan of about $1.758 million using a medium-term interest rate of 3.5% previously.
The result is a shortfall of nearly $91,000 in loan quantum.
Medium-Term Interest Rate of 4% – Executive Condos (EC).
For EC buyers, under the framework of MSR, a household with an income of $16,000 per month, the maximum home loan will only be about $909,300 using a medium-term interest rate of 4%, compared to a maximum home loan of about $958,800 using a medium-term interest rate of 3.5% previously.
The result is a shortfall of nearly $50,000 in loan quantum
Ensure HDB Resale Flats Remain Affordable.
Besides encouraging prudent borrowing in the private and EC segment, the cooling measures also introduced an interest rate floor of 3% for computing the eligible home loan amount for HDB Loan. In addition, the Loan-to-Value (LTV) limit for HDB housing loans is adjusted from 85% to 80% (the LTV was adjusted from 90% to 85% in December 2021).
Another cooling measure to moderate demand and ensure that HDB resale flats remain affordable is the new 15-month wait-out period for private home owners who want to buy non-subsidised HDB resale flats after disposal of their private homes. However, this 15-month wait-out period will not apply to seniors aged 55 and above (both the husband and wife must be aged 55 and above) who are downgrading from their private home to a 4-room or smaller HDB resale flat.
80% LTV and Medium-Term Interest Rate of 3% for HDB Home Loan.
For HDB buyers taking HDB loans, lower LTV and higher medium-term interest rates will affect the maximum home loan amount. For example, a buyer who is going to buy a flat with a value of $800,000 is only able to get a maximum home loan of $640,000. It is $40,000 lower before the new cooling measures (see Table 3A).
However, with the tighter LTV limit come a lower loan quantum, which results in lower monthly home loan instalment repayment. The above example will have a drop of $50 to $3,035 from $3,085 monthly home loan repayment when computed based on an interest rate of 2.6% (Table 3B) for a flat valued at $800,000.
This new set of cooling measures will affect property buyers and downgraders. For home buyers, they have to recalculate their sum due to higher medium-term interest rates and lower LTV limit (for HDB Housing Loan) and for those looking to downgrade from their private home to a resale HDB, renting might be one of the interim solutions for the 15-month wait-out period.