Buying an HBD home? Don’t take loans irresponsibly; listen to the Mortgage Servicing Ratio; it might just save you from bankruptcy!

What is Mortgage Servicing Ratio MSR
What Happens If You Exceed the 30 Mortgage Servicing Ratio MSR

Introduction

Are you in need of a home loan for an HBD flat? Or maybe you’re looking to buy an executive condominium? 

You’ll definitely need a residential property loan unless you’re some sort of billionaire. 

Now, most people are already aware of the ins and outs and the rules and regulations regarding loans and other financial frameworks.

A well-informed individual may be aware of options like a deferment period where the interest is negated or fall- below service fees which are basically penalties charged when someone’s bank balance drops below the minimum daily balance. 

These things are picked up eventually as you delve deeper into the financial world. 

But there might be some people out there who are uninitiated in the world of finance and are hoping to understand some of its details. 

Do note that by ‘some’ people, we mean you. 

You see, when you take a loan to buy a home, be it a bank loan, HBD loan, etc., there are certain limitations put in place.

You can’t just borrow whatever amount you wish, if that were the case, the world would’ve been upside down by now, and bankruptcy would’ve eaten us all alive. 

Banks and financial institutions have to determine precisely how much money a loan applicant should be allowed to borrow.

This is done by checking the applicant’s monthly income, which is then used to determine how much they can use to pay back the loan every month. 

The mortgage servicing ratio is that portion of your monthly income that can be used to pay back your mortgage payments. 

This then translates into a time frame called loan tenure, within which the applicant is projected to pay off the entire loan. 

If the bank or institution determines that you are NOT able to pay back the loan within the loan tenure, they have two choices; either increase the loan tenure or decrease the loan amount. 

And in the Worst case scenario, they will simply reject your loan.

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What is Mortgage Servicing Ratio (MSR)?

The Mortgage Servicing Ratio is essentially a limitation put on the maximum home loan amount that you can borrow from the bank or HBD.

You could also say that it is a form of determining the loan eligibility amongst home loan applicants.  

The MSR applies only for loans related to certain types of residential property, such as HBD flats and executive condominiums. 

It is calculated by assessing your monthly income so that the lender can determine your monthly loan repayment capacity. 

Currently, the MSR is set at 30 % of your fixed monthly income.

The MSR is determined by only including loan repayments that have to do with the current loan and not your debt obligations for other credit facilities, for example, a car loan.

If you have any sort of variable income, you can include 70% of that into the calculations for MSR.

In that case, the MSR will be calculated on your fixed monthly income plus 70 % of your variable income.

Loan applicants must meet the MSR standard if they want their loans to be accepted.

Note that MSR is only applicable to loans for HBD flats and Executive condos, so naturally, other forms of loans, such as equity loans, mortgage equity withdrawal loans, etc., do not have any MSR. 

History of the Mortgage Servicing Ratio (MSR) in Singapore

Singaporeans today are quite familiar with the 30 % MSR rate applied today, but do we know how it got to that number in the first place?

What most people don’t know about the Mortgage servicing Ratio is that the applicable rates used to be much higher initially. 

Back in the day, the MSR was set to a rate of 40 % of the applicant’s eligible income in a month. 

The rate was then lowered by 5 % in January 2013, making it 35 %.

Meanwhile, due to a new policy set by the Monetary Association of Singapore (MAS), the MSR limit was further reduced to 30 % for bank-issued loans on HBD flats.

Then, later on in August of 2013, there was another change added to the MSR limit.

The MSR rate for all HBD-issued loans was then lowered to 30 %, making it the same rate as the loans issued by the banks.

Then finally, on 9th December, the MSR rate for bank loans on executive condos bought directly from property developers was lowered to 30 %.

So now, all HBD loans and bank loans for ECs and HBD flats come at a universal MSR rate of 30 %.

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Mortgage Servicing Ratio MSR Exemptions

What are the MSR Rules?

What are the MSR Rules

Singapore citizens can apply for an HBD loan or a bank loan to buy an HDB property or a private executive condominium ( if the minimum occupation period has not expired)

According to governmental regulations, the MSR can only be applied to the loans that pertain to the above financing choices. 

The MSR is calculated on 30 % of the loan applicant’s gross monthly income. 

Financial institutions take into account all of the monthly debt obligations related to the property loans of the applicant. 

Moreover, if the applicant is a guarantor, then at least 20 % of all monthly debt obligations are taken into account. 

Calculating MSR

The MST is calculated with a simple formula of dividing all the monthly payment obligations regarding mortgage and other property loans by the total gross income per month. 

The official formula for the calculation = ( All repayment installments for property loans in a month/ total monthly income) x 100%  ≤ 30%

If there are joint borrowers, the total monthly obligations of both parties are included in the calculation of gross monthly income. 

For example, if your monthly income is, say, $ 4000, then we can figure how much of that amount you can commit to mortgage repayments by using the 30 % MSR rate. 

So, the total amount you can use to pay for your mortgage every month will be $ 1200. 

Now, if the MSR that comes from this calculation is somehow more than 30 %, the applicant will have to rely on loan tenure extensions or a debt reduction plan which allows them to lower the monthly payments for property-related loans. 

If these financing options are not doable, then the applicant can pay a higher downpayment for the loan in cash. 

The applicant can choose to sell some of his/her other property assets to get enough capital for a high downpayment.

Mortgage Servicing Ratio (MSR) Exemptions

Other than in the case of private residential properties, there may be several exemptions made in the Mortgage Servicing Ratio. 

Such exmptions are granted to any existing borrower who wishes to refinance their HBD flat or executive condo, provided that the borrower is currently occupying the property. 

However, there are certain conditions that apply to this exemption. 

According to the regulations, only HBD flats that were purchased before the 12th of January 2013, and ECs purchased directly from the developer before the 10th of December 2013 can qualify to receive this exemption.

What is the difference between TDSR and MSR?

While both these regulations are basic banking services, there are several distinctions between the two. 

To start, the MSR is only valid for certain housing decisions, such as HBD flats and executive condos, while the TDSR is applicable on all loans pertaining to any kind of housing, be it public or private. 

Another difference is in the calculations; the computation of the Total Debt Servicing Ratio for Property Loans is done differently from that of the Mortgage servicing ratio. 

TDSR calculations consider every aspect of your other loan repayments as well, such as credit card debt, car loan, personal debt, etc. 

This means that your miscellaneous debt obligations should not exceed 55 % TDSR for you to secure the desired loan amount. 

So obviously, if you have any existing debts or loans, it will lower your chances of securing the desired amount for your home loan.

Meanwhile, the MSR considers your income and other property loan obligations but excludes any miscellaneous loans. 

So to conclude, MSR will be a limiting factor for first-time home buyers, first-time resale flat buyers, or anyone who is buying residential property for the first time. (Public HBD housing and Private ECs)

Simply put, both have different formulas and consider different aspects and factors of the payments; however, both TDSR and MSR standards have to be met while applying for a home loan. 

Implications Of Mortgage Service Ratio

According to popular opinion, it might be that fulfilling the MSR criteria is more challenging than the requirements of any debt servicing ratio. 

So technically, there may be cases where you can secure a higher loan amount for a private property loan than an HBD-issued loan. 

However, at the end of the day, it all depends on monthly income and whether or not you have any prior debt obligations for property or other miscellaneous factors.

Other Factors to Take Note Of

There are also other factors that are taken into consideration while calculating your monthly loan repayment amount. 

In the case of Bank loan applications, the bank will issue a medium-term rate of interest, roughly around 3 % or 4 %, which will be used in the monthly loan payment calculations.

If the applicant has variable income sources, such as commissions, bonuses, or retirement income, those incomes will be adjusted to 70 % of the amount. 

Any financial asset that the applicant owns will be pledged to the bank for a term of 4 years.

Finally, if the applicant is borrowing the maximum loan-to-value ratio amount, then the maximum loan tenure will top out at 30 years. 

Meanwhile, in the case of HBD loans, the tenure will top out at 25 years or on the number of years it takes for the applicant to reach 65 years of age (Whatever is lower)

Figuring the loan limit is done by applying the HBD concessionary rate of interest; this is basically the prevailing CPF rate with 2.6 % added. 

Finally, the loan ceiling is capped at 90 %.

Other Factors to Take Note Of

What Happens If You Exceed the 30% Mortgage Servicing Ratio (MSR)?

There might be cases where the monthly payment obligations for home loans and mortgages exceed the 30 % MSR mark. 

If that is the case for you, don’t worry, you have several options to explore.

The first thing you can do is go for a loan tenure extension so that the total loan payment is spread out over a longer period of time. 

This will automatically lower the maximum amount you have to allocate for your mortgage repayment each month, as you now have more time to pay off the entire loan amount. 

Another way of balancing out the MSR is by making a larger cash downpayment to lower the amount you eventually borrow, thus allowing you to allocate less of your monthly income for the loan repayment. 

Other than that, you can lower the repayment obligations on other properties so that you can lower the overall financial strain. 

You could even sell those properties whose loans you haven’t finished paying yet to get some capital returns to spend on your latest home loan. 

If nothing else works, we recommend you go for a property in a lower price range. 

After all, you can’t hope to attain a property beyond your financial budget; attempting to do so will only strain your finances and bring you closer to bankruptcy.

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