This is very typical of Government announcing cooling measures at the 11th hour to prevent anybody from being able to react. The cooling measures are classified into 2 different categories, encouraging prudent borrowing & moderating the HDB resale market. We will also look at how to circumvent the cooling measure legally.
Encouraging Prudent Borrowing
MAS raised a 0.5%-point on the medium-term interest rate floor used to compute the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR). The rate was based on 3.5%, and after the increment will now be 4.0%. What it effectively means is you will only be able to borrow lesser and your cash/CPF outlay will be higher.
Let’s use an example to illustrate the differences.
| TDSR Table | 3.5% | 4.0% | Shortfall |
|---|---|---|---|
| Max Monthly Instalment | S$5,500 | S$5,500 | |
| Max Loan Amount | S$1,098,630 | S$1,041,989 | -S$56,641 |
| MSR Table (EC) | 3.5% | 4.0% | Shortfall |
|---|---|---|---|
| Max Monthly Instalment | S$3,000 | S$3,000 | |
| Max Loan Amount | S$599,252 | S$568,357 | -S$30,895 |
What about housing loans granted by HDB? The base interest was raised by 0.4%-point from 2.6% to 3.0%. The Loan-To-Value (LTV) limit will be lowered from 85% to 80%. Those planning to purchase an HDB from 30th September 2022 onwards must fork out higher cash/CPF. Take note that the Ministry of National Development (MND) did highlight that all these measures are temporary and will revise according to market circumstances. This is the first time temporary measures were introduced unlike the previous cooling measures.
How Do I Cover The Shortfall Caused?
You will not be affected under the following clause:-
- Loans for the purchase of properties where the Option to Purchase (OTP) is granted on or after 30th September 2022, or where there is no OTP, the date of the Sale and Purchase Agreement is on or after 30th September 2022.
- Existing HLE applications received by HDB before 30th September 2022.
What if you are affected and need to minimise the effect of the cooling measure? There are several legal means to do it but we will touch on two popular ways – Pledging & Unpledging (Table 1).
Pledging
| Loan Needed | Max Instalment | Instalment Needed | Shortfall |
|---|---|---|---|
| S$1,098,630 | S$5,500 | S$5,798.97 | -S$298.97 |
Pledge S$26,091 for 4 years to the Financial Institution you are borrowing from.
S$5798.97 (Subjected To TDSR) / 55% (Current TDSR Rate) = S$10,543.58 (Income Needed)
S$10,543.58 – S$10,000 (Current Income) = S$543.58 (Shortfall)
S$543.58 x 48 (4 Years Pledged) = S$26,091.84
Unpledging
Alternatively, if you do not wish for your funds to be locked for a staggering 48 months, you can prove to the Financial Institution that you can finance the loan by proof of funds. Unpledged funds will only be recognised at 30% of the total amount.
S$26,091.84 / 30% (Recognition Percentage) = S$86,972.80
You must show the financial institution S$86,972.80 in your bank statement during the Loan Application and before Loan Disbursement. If you are wondering, the financial institution WILL NOT ask where the funds come from. You might be thinking if you had the sum of money, why not use that for the property purchase instead?
Depending on your perspective, Investors will generally tell everyone the key to success is Leveraging. If you have that sum of money, why not use it effectively to generate higher returns rather than throwing it into an asset? Moreover, with the Seller Stamp Duty (SSD), you will likely hold on to the property for four years or more.
Leverage is the reason some people become rich and others do not become rich
Robert Kiyosaki
If you do not have that hefty sum of funds available yet do not want to tie down your finances for 48 months, we do have other creative methods! ✌🏻
Moderating Demand For HDB Flats
Private Property Owners & Ex-Private Property Owners (PPOs) will now have a wait-out period of 15 months from the completion of sales to purchase a non-subsidised resale HDB flat. Again this is a temporary measure announced by MND. PPOs who are first-timers and looking to apply for a Built-To-Order (BTO) flat or utilising CPF Housing Grant for their resale flat purchase will have a wait-out period of 30 months.
According to statistics, PPOs are more likely to pay more for any Cash-Over-Valuation (COV), resulting in several HDB flats setting astronomical resale prices in 2022.
With the above measure, PPOs who just sold their property will either have to rent a place or buy another private property. This will likely cause the already red-hot rental market to rise again. It may not make sense to re-enter when you have just sold your property in the current market situation.
PPOs aged 55 and above can purchase a 4-room or smaller resale flat without the 15 months wait-out period. Do note that both owners must be aged 55 or older. The same restriction shall apply if either party is younger than 55 years old.