What Is The Mortgage Servicing Ratio (MSR) When You Buy A HDB Or Executive Condo (EC) Flat
For most of us, purchasing a property is one of the largest financial decisions we would have to make in our lifetime. Based on May 2021 BTO sales launch, the BTO prices for a 4-room flat range from $275,000 to $710,000. Given the median salary in 2020 is about $3,800, our first property purchase can be easily seventy times more than our monthly salary. This means that most of us would not be able to finance the purchase without taking on a loan size of over a hundred thousand.
To make our property purchase less stressful, we can first understand our financing options before deciding on a property based on affordability.
As we look at our financing options, there are four main loan limitations on property purchases: loan tenure, Loan to Value (LTV), Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR). These loan limits are set in place to ensure borrowers are not over-leveraged.
In this article, we will discuss more on Mortgage Servicing Ratio (MSR) and how does it affect BTO flat and EC applicants.
Mortgage Servicing Ratio Is Only For Property Repayment, Capped at 30% Of Monthly Gross Income
Unlike the other housing loan limits, the Mortgage Servicing Ratio is only applicable for HDB flats and Executive Condominiums (ECs) where the minimum occupation period of the executive condominium has not expired. This means ECs that are bought directly from the developer are subject to MSR while a resale EC (5 years after the Temporary Occupation Period) is not subject to MSR. The same MSR will also apply to HDB flats and ECs refinancing within MOP.
Mortgage Servicing Ratio (MSR) is the maximum percentage of our gross income that we can use to service all our property loans. The current MSR limit is capped at 30%. Additionally, banks have to take into consideration at least 20% of monthly debt payments for the borrower who is also the guarantor, when assessing the MSR. This MSR limit is applicable for all loans from financial institutions and HDB.
The formula for MSR is (Monthly repayment instalments for all property loans / Gross monthly Income) x 100% ≤ 30%.
For example, if our monthly income is $3,800, our monthly housing loan payments should not exceed $1,140.
For joint borrowers, the MSR is capped at 30% of the combined gross monthly income.
Implications Of Mortgage Service Ratio
For those that have applied for our BTO flats or ECs successfully, we need to remember to account for MSR. While we are all familiar with TDSR, which is capped at 60% of gross monthly income used to finance all debt payments, MSR is only for property repayment and is capped at 30% of gross monthly income.
For some cases, MSR is a more stringent criterion to fulfill than the TDSR. This also means that it may be possible to obtain a larger loan for a private property than for an HDB flat, depending on your loan obligations and monthly income situation. For more in-depth advice on home loans, you can turn to a good, trusted broker like our friends at RedBrick who can provide you with a free non-obligatory quote and consultation.
To qualify for a housing loan, both TDSR and MSR have to be satisfied. In the event that we exceed the MSR limit, we can mitigate it through three methods. Firstly, we can reduce our loan quantum by paying more upfront either through our CPF or cash. Secondly, if we have not maxed out our loan tenure, we can apply for a longer term. Lastly, if we are being limited because of our other property loan obligations, we can refinance our existing loans to reduce monthly repayment.
Exemptions From Mortgage Service Ratio
To support individuals through COVID-19, MAS has allowed HDB and ECs owners that are within the MOP to refinance at a lower rate without being subjected to the MSR and TDSR limit. Application to refinance property loans ends on 30 September 2021.
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