How does falling HDB COV impact your loan and Mortgage Servicing Ratio (MSR)?

You by now would have heard of the falling dagger in the HDB market. By that, I am referring to the falling cash over valuation premium for resale flats. What does this mean for buyers? How does the HDB COV impact your loan and MSR?

First drop since 2009

For the first time since global financial crisis in 2009, it has fallen below $10,000. From the low point in July 2009, COV premium went from negative (for a short while) to more than $100,000 sharply in 2012. With the various measures and Mortgage Servicing Ratio (MSR) criteria, it is now again in negative territory for certain districts. Firstly, you should be aware of the landscape changes if you have not been reading the news. Authorities have introduced TDSR (Total Debt Servicing Ratio) and the above-mentioned MSR for HDB flats. While COV has fallen and valuation expected to be lower in the upcoming months, borrowing limits are impacted by these cooling measures.

Instead of shouting ‘cheap’, FindaHomeLoan.co have continued on the previous article on HDB affordability. Today we look at the real impact on cash outlay, MSR and monthly repayments.

Impact on purchasing a HDB flat

Assuming you are looking for a $500,000 flat and cash budget of $45,000, your options would have been limited during the days of higher COV, resulting in smaller cash deposit and inevitably a smaller flat or budget. Previously, $45,000 would have been split to meeting the 5% cash downpayment and the remaining towards COV, fattening the seller’s pocket. Fast forward today, you can utilize the $45,000 fully for downpayment and reap the benefits of a smaller loan quantum and passing the high MSR threshold.

Improved loan eligibility

With the additional $20,000 in hand, your loan quantum would have reduced by the similar amount. Mortgage servicing ratio is set at 30% for HDB loans. If you need more info, read our published views on MSR. Maximum tenure is also reduced to 25 years or age 65, whichever is earlier. But wait, there is one more. Interest rate used by banks to assess your eligibility is now standardized at 3.5%. Collectively, they have restricted the amount one can borrow compared to the good old days. Based on a $380,000 loan, the monthly repayments for MSR assessment is $1,903. Most importantly, this has a positive effect on the total monthly gross income, which has come down to $6,344. This means to qualify for $380,000 loan, you and spouse (if any) should be drawing this income. Compared to $6,677 income after paying $20,000 of COV, I think this is good news.

Estimated housing loan repayments

The above repayment is used to calculate MSR and is not reflective of what you should be paying today. So looking at the best resale HDB loans on offer currently, monthly HDB repayments are estimated at $1,484, about $80 lesser if you had less cash as downpayment. If you are keen on fixed mortgage rates, it is at $1,498. Take a look at the installments for HDB concessionary rates. It would mean a hefty $220 more per month at $1,724!

We revisited the table in 2017 and noted HDB bank loan interest rates were back to 2012 level.

Conclusion

Now… Are these good news for HDB buyers? We certainly think so. Affordability is certainly better with reducing COV. And your monthly liability is surely less of a headache, especially comparing with HDB loans. Here are the tools we used in this article, that you may find useful: