Homebuying is more than just shortlisting desirable units from property marketplaces, arranging for viewings with property agents and getting excited about your new home. There is also the financial aspect that you need to take care of.
The reality is that your home is such a big ticket item that few homebuyers will ever have enough cash to pay it off one shot. For most homebuyers, you will need to rely on some form of financing to help you buy a home, be it from HDB or from the banks.
So, to help every homebuyer out there in your homebuying journey, we curated this home financing checklist for you. The home financing checklist contains all the things you need to be checking before making your home purchase, just to be sure you covered everything on the financing aspect of homebuying.
1. Total Debt Servicing Ratio (TDSR)
What Is TDSR?
TDSR is a debt servicing ratio that limits the total amount that you can borrow based on your existing income.
TDSR = 60% x gross monthly household income
Total Debt Servicing Ratio, or more commonly known by its acronym TDSR, was first introduced back in 2013. TDSR was among the cooling measures introduced by the government (together with ABSD) to cool down the property market at that time.
At the moment, TDSR is set at 60%, which means that you can only use 60% of your gross monthly income to finance (or service) ANY kind of debt. This includes car loans, personal loans and home loan.
How Does TDSR Impact Homebuyers?
The main reason behind TDSR’s introduction is to ensure that homebuyers do not overstretch your credit limit, which can lead to overleveraging. With TDSR, homebuyers are forced to be more prudent when investing in your home.
For example, if you are interested in buying a $1m private property, your gross household income needs to be at least $7,500 to be able to support it.
How To Use TDSR As A Homebuyer?
TDSR is a hard cap that Monetary Authority of Singapore (MAS) sets on banks when extending loans to homebuyers for private properties.
Since you cannot loan more than what the TDSR restricts you to, you can use the TDSR as a gauge for your maximum budget for the property. It also ensures that you do not overstretch yourself and end up creating financial distress for yourself.
Confused about TDSR or how it affects your home loan? Let our experienced team of mortgage consultants answer your doubts for you.
2. Mortgage Servicing Ratio (MSR)
What Is MSR?
Mortgage Servicing Ratio (MSR) is the cousin of TDSR that was also introduced in 2013.
MSR = 30% x gross monthly household income
MSR works in the exact manner as TDSR, except for these two key differences
|Type of Property Loan||Purchase of HDB flats or ECs within MOP||Any property loan|
How Does MSR Impact Homebuyers?
Similar to TDSR, MSR forces you to be prudent as a homebuyer even though you are buying a more affordable HDB flat. Likewise, your gross monthly household income will need to support the mortgage you plan to loan from either HDB or banks.
One potential reason why MSR is capped at 30% (instead of 60%) is because HDB flats are meant to be more affordable. HDBs can be anywhere between 50% to 80% cheaper than private housing. As such, if MSR is set at the TDSR ratio of 60%, it might create inflated housing prices on the public housing market.
Another plausible reason is because the CPF contribution rate for an employed Singaporean is 37% (20% from self-contribution + 17% from employer contribution). By setting the MSR ratio at 30%, every employed Singaporean will be able to meet your monthly mortgage repayment by simply drawing it from your CPF OA.
How To Use MSR As A Homebuyer?
The idea behind both TDSR and MSR is to set a hard limit on how much homebuyers can borrow from HDB or banks for your property purchase. Like TDSR, MSR can be used to gauge the maximum quantum of your housing budget.
3. Savings Ratio
What Is Savings Ratio?
The savings ratio should be something that everyone (including non-homebuyers) is familiar with and needs little introduction. Savings ratio is a simple ratio that measures how much of your monthly income you are saving.
Savings Ratio = Total monthly savings / Gross monthly household income
How Does Savings Ratio Impact Homebuyers?
For those who are intending to purchase a private property, your monthly mortgage can be as high as 60% of your monthly income, i.e. if you choose to max out your home loan quantum. Given that CPF contribution is only 37% (see explanation above under MSR), you still need at least another 23% to bridge the gap.
Thus, if your savings ratio is below 23%, you are in a dangerous position where you can default on your monthly mortgage repayment anytime if your income source gets cut off.
How To Use Savings Ratio As A Homebuyer?
Savings ratio can give you an early warning of whether you are likely to default on your monthly mortgage repayment. If your savings ratio is < 25%, be sure to change your spending habits and improve your savings ratio once you sign the agreement to buy your property.
|Savings Ratio||Odds of Non-Repayment|
|Less than 25%||High|
|25% - 50%||Medium|
|More than 50%||Low|
4. Liquidity Ratio
What Is Liquidity Ratio?
Having cash set aside for emergencies is also important when it comes to buying a big-ticket item like property. The adequacy of emergency cash you have on hand can be measured using the liquidity ratio.
Liquidity ratio = Cash balance or cash equivalent that you can easily convert into cash / total monthly expenses (including monthly mortgage repayment)
How Does Liquidity Ratio Impact Homebuyers?
Liquidity ratio indicates how many months of monthly expenses you can “tank” from your existing cash/cash equivalent savings.
To put it simply, the liquidity ratio will tell you how many months you can survive without income, i.e. in the event that you get retrenched or a pay cut. And some of us might even have seen first-hand how COVID-19 impacted the ability of some Singaporean households to pay for their home loans.
How To Use Liquidity Ratio As A Homebuyer?
Before you commit to purchase your home, do a quick back-of-the-envelope calculation to see what’s your liquidity ratio.
A safe liquidity ratio to have is at least 6 months, which gives a good buffer for you to adjust to any job loss or income reduction situation when you start paying off your mortgage.
|Liquidity Ratio||Odds of Non-Repayment|
|Less than 3 months||High|
|3 - 6 months||Medium|
|More than 6 months||Low|
5. Credit Score
What Is Credit Score?
Credit score is a credit rating score given by the Credit Bureau Singapore (CBS) for an individual who wants to borrow money from the bank. The score takes into account your past loan repayment history, from credit cards, car loan to home loan.
Credit score comes with a range between 1,000 to 2,000. The lower the credit score, the higher the odds of you defaulting on any loan.
How Does Credit Score Impact Homebuyers?
Banks use credit score as one of the criterion to assess the loan eligibility of a homebuyer. If you have a low credit score, banks might not want to take the risk to offer you a home loan. After all, you might have a high chance of defaulting on the home loan.
In some cases, the bank might still offer you a home loan, but they will either lower the home loan amount or offer you higher interest rate to adjust for your lower credit score.
How To Use Credit Score As A Homebuyer?
If you are planning to borrow from banks to finance your home, you need to build a good credit score prior to getting the loan.
There are a number of ways to improve your credit score. One of the easiest way is to sign up for a credit card and ensure that you repay your monthly credit bill promptly. The longer you keep this up, the better your creditworthiness. This will have a direct positive impact on your credit score.
Need some tips on how to improve your credit score? Get in touch with our experienced team to help you improve your credit score.
6. Home Loan Eligibility (HLE) from HDB / In-Principle Approval from Bank
What Is Home Loan Eligibility / In-Principle Approval?
Before you can get a loan, you need a formal letter from bank/HDB. This formal letter comes in different forms.
- For HDB, this letter is known as the Home Loan Eligibility (HLE).
- For banks, it is called an In-Principle Approval.
The letter comes with a few key information that is needed when you buy your property:
- HDB/Bank is willing to extend a loan to you to finance your home purchase
- The amount that HDB/bank is willing and able to extend to you
How Does Home Loan Eligibility / In-Principle Approval Impact Homebuyers?
Without an HLE/In-Principle Approval, you run the risk of being unable to secure financing for your property purchase.
Just imagine a situation where you find your dream home where the seller is willing to part for $1m.
- You put in a non-refundable deposit to secure an Option-to-Purchase (OTP) so as to avoid another buyer from snatching the property from you.
- You try to get a home loan from the bank.
- You realise that the bank is only willing and able to loan you $700k.
- You are now in no man’s land because you didn’t get the formal approval in the first place.
- You end up losing both your dream home and your non-refundable deposit.
How To Use Home Loan Eligibility / In-Principle Approval As A Homebuyer?
The scenario we shared above is a nightmare for almost any homebuyer. Nobody in the right mind wants to go through that.
And the biggest irony is that getting the HLE/In-Principle Approval is really simple. All you need is to apply for one online.
- For HDB, the HLE can be applied for on HDB website.
- For banks, you can apply for one on the respective banks’ website.
Another easy way to get your In-Principle Approval for bank loan is to do it through Mortgage Master. We not only help you to get the In-Principle Approval, we also compare and source for the best interest rates from all the banks so that you can enjoy the best home loan package possible.
Still Clueless About Home Financing?
We know that home financing can be a tad too technical for some of us, even with our home financing checklist. That’s why we started Mortgage Master so that we can offer professional advice to homebuyers like you!
At Mortgage Master, we know the latest home loan packages in the market and sometimes can even offer exclusive interest rate packages that you cannot get directly from the bank. We will do all the necessary comparisons and paperwork on your behalf. While we do the work, you benefit the most!
So, if you're looking to purchase a new property, or refinance your existing home loan, fill up our enquiry form and our mortgage consultants will follow up with a call.