Buying a resale flat isn’t as simple as it was. Especially made more confusing by the 30% Mortgage Service Ratio introduced in the January cooling measures. We’ve found out a couple of interesting things from the experts at FindaHomeLoan.co, in particular for buyers who are commission-based earners and the self-employed. Learn about this and more in this enlightening article.
How does the 30% MSR affect HDB buyers?
The last cooling measure announced by the government on 12 January 2013 has impacted buyers of HDB flats. From financing perspective, the 30% MSR is a measure definitely worth dwelling into.
What is the 30% MSR measure about?
MSR stands for Mortgage Service Ratio. It’s a metric to measure the monthly installments as a percentage of the borrower’s gross monthly income. Effectively from January onwards, buyers of HDB who are taking loans from banks and financial institutions can only use 30% of their monthly income (gross) to pay for the installments. If you are taking a loan from HDB, the ratio is decreased from 40% to 30%. This measure affects refinancing HDB loan applications too.
How is MSR calculated?
According to MAS, “The monthly repayment instalment used in the computation of the MSR shall be determined by using, at minimum, a medium-term interest rate. Introductory rates applied at the initial years of the loan should not be used.”
So what is medium-term interest rate? It’s an arbitrary rate used by financial institutions to calculate the installments. It’s typically 3% to 3.5% and not based on the current rates of the loan packages.
Gross monthly income may not strictly refers to the monthly income as shown in the pay slips. For commission earners, their assessment will be based on the Notice of Assessment (NOA) for past 2 to 3 years. This may also apply to self-employed. But take note! Your entire income is not recognized 100%. This means bonuses, commissions, allowances are only recognized at typically 70% of what it’s worth. Your basic salary will be at 100%.
We have developed a calculator to compute your MSR. Check it out here.
How does this ruling affect you?
Let’s look at a case study that’s quite typical of the applications we have processed. Names have been masked to protect identities. For simplicity, incomes of their spouses are excluded.
Mr Tan has a job that incentives him much. He is on a commission scheme where it pays 10% of basic salary and 90% as commissions. He makes $75,000 last year which is made up of $7,500 (basic salary) and $67,500 (commissions and transport allowance). The $67,500 is recognized at 70%, hence his total income is only $54,750.00 in the eyes of the bank. Applying a medium-term interest rate of 3.8% and 30% of MSR, his maximum monthly installment is $1,368.
This translates to a 80% loan amount of $293,000 on a 30-year loan tenure or $366,000 purchase price. If tenure is shortened to 20 years, the loan will be $230,000 or $287,000 purchase price.
You can see the real impact of the 30% MSR cap on affordability.
If MSR was higher say 50%, his allowed monthly installments would increase to $2,281. He would be able to afford a purchase price of $480,000 based on 30-year tenure.
You can see the real impact of the 30% MSR cap on affordability. Overnight, Mr Tan can no longer buy a flat more than $366,000 if he is borrowing 80% over 30 years. For him to pursue the dream flat of $480,000, he must increase the downpayment to reduce the loan amount.
Do you know that a salaried employee who makes $55,000 in basic salary (without bonus) have the same affordability as Mr Tan who earns more as a commission salesperson? This is because $55,000 is recognized at 100% in calculating the MSR. A case of less is more?
Importance of approval in-principle (AIP)
We have always advocate the importance of obtaining AIP first, before purchasing a property. As assessment critieria differs from bank to bank, one should apply with few banks. With AIP in-hand, a property buyer can do his maths better and confidently purchase a property.
This article first appeared in H88.com.sg
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