Singapore implement new cooling measures with stricter borrowing criteria
In light of recent increases in interest rates, the government has introduced a number of new policies targeted at reducing the demand for real estate and promoting responsible borrowing practices.
One of the measures—which includes tightening the maximum loan quantum limits—will go into effect. The maximum allowed loan-to-value ratio for HDB loans has been reduced from 85% to 80% of the property’s worth.
There is now a wait-out term of 15 months for private house owners who are interested in purchasing HDB resale apartments. This was done in an effort to control demand in the HDB resale market.
In a joint press release that was issued, HDB, the Monetary Authority of Singapore (MAS), and the Ministry of National Development (MND) stated that “It is a temporary measure which will be reviewed in the future depending on overall market conditions and housing demand.” “It is a temporary measure which will be reviewed in the future depending on overall market conditions and housing demand.”
Adjustment of Loan Limits
Desmond Lee, Singapore’s Minister for National Development, stated on Friday that Singapore benefited from “exceptionally low interest rates” from 2013 to 2021, particularly from private financial institutions. He noted that introductory rates for new housing loans hovered around 2% during this time period.
However, he went on to say that there has been a rise in the interest rates offered by the market over the course of the last year.
According to what he stated, “this would raise the price of borrowing for individuals who are purchasing a house, as well as for those who are repaying existing home loans that are connected to variable rates.”
Mr. Lee also said that it is anticipated that the interest rates on mortgages would continue to climb in the future, along with the interest rates in the United States.
On Thursday, the authorities announced that the government intends to restrict the maximum loan quantum limitations for housing loans in order to guarantee responsible borrowing and prevent future challenges in the repaying of house loans.
The medium-term interest rate floor, which is used to determine the mortgage servicing ratio (MSR) and the total debt servicing ratio (TDSR), has been increased by 0.5 percentage point for property loans from private financial institutions. This change was made effective as of January 1, 2018.
The Total Debt Service Ratio (TDSR) is the percentage of a borrower’s gross monthly income that goes toward repaying the borrower’s monthly debt obligations, which includes the loan for which the borrower is applying, whereas the Minimum Service Ratio (MSR) is relevant to loans for HDB apartments.
The authorities are tightening the parameters that are used to evaluate a borrower’s capacity to repay a loan by increasing the minimum interest rate on medium-term loans.
This will apply to mortgages on residential or commercial properties in which the option to buy (OTP) is issued on or after September 30. In the event that there is no such thing as an option to buy, then it will become applicable whenever the date of the sale and purchase agreement falls on or after that date.
The private financial organizations are the ones who will continue to set the real interest rates that are charged for mortgages.
An interest rate floor of 3% will be implemented by HDB for loans that it grants, and this floor will be used in the computation of the maximum amount of loan eligibility.
This indicates that the interest rate that will be utilized in the calculation of the eligible amount for HDB’s concessionary housing loan will be 3% per annum or 0.1 percentage point above the prevalent CPF Ordinary Account interest rate – whichever is higher. This will be the case because of the way that this calculation is carried out.
Any new applications for a HDB loan eligibility letter that are received on or after the stroke of midnight on September 30 will be subject to the new interest rate floor.
There will be no effect on previously submitted applications that HDB has already received before this time. It will also have no effect on the real HDB concessionary interest rate, which will stay the same as it is now, which is 2.6% per year.
Loan to Value Limit Adjustment for HDB Loans
In the meanwhile, the maximum loan-to-value ratio (LTV) for HDB loans will be reduced from 85% to 80% of the property’s value.
This results in a reduction in the maximum amount that prospective homeowners may borrow from HDB. However, the increased restriction will not apply to loans that are given by financial institutions; instead, the current maximum of 75% will continue to apply to these loans.
The authorities have said that the reduced LTV limit would be applicable to new flat applications for sales operations initiated and full resale applications which are received by HDB on or after September 30, 2022.
They went on to say that they did not anticipate this change to have a significant impact on first-time flat buyers or buyers with lower incomes. This is because these potential homeowners continue to receive housing grants of up to S$80,000 when purchasing a subsidized flat directly from HDB or up to S$160,000 when purchasing a resale flat, depending on the type of flat they purchase.
“They may also call on their CPF savings to pay for the apartment purchase, hence decreasing the loan amount they may need to borrow,” the authorities stated. “They can also touch on their CPF savings to pay for the purchase of a flat.”
Wait Out Period of 15 Months
The most recent set of policies were put into effect around nine months after the last package of policies, which had been implemented in December of the previous year.
Since then, the HDB Resale Price Index has seen a gain of more than 5% as of the end of the second quarter of 2022, according to the observations made by the authorities.
A wait-out term of 15 months has been enforced by the government on private house owners before they are allowed to acquire a non-subsidized HDB resale property. This was done in order to dampen demand and take into account the “obvious upward trend in HDB resale prices.”
After they have sold their property, this provision will take effect.
Those people who sold their personal property prior to making an application to acquire a resale unit are subject to the new regulation as well since it applies to them.
In the past, anyone who owned such properties may purchase a HDB resale apartment on the open market provided they sold their private properties within six months of obtaining the HDB unit and used the proceeds to pay for the HDB flat.
The authorities have said that the new 15-month wait-out time would not apply to elderly citizens aged 55 or older who are relocating from their own private home to a resale apartment with four rooms or less.
The waiting period of thirty months for private house owners who are first-time buyers and intend to apply for the Central Provident Fund Housing Grant and the Enhanced Central Provident Fund Housing Grant for their purchase of a resale apartment has not altered since it was established.
The new wait-out period of 15 months is a temporary solution that will be evaluated at a later date.
Regarding the wait-out period, Mr. Lee stated on Friday that private residential property owners “generally have more means to buy resale flats,” in comparison to first-time home buyers or existing HDB flat owners. This was said in reference to the fact that private residential property owners do not have to comply with the wait-out period.
According to what he stated, “it’s possible that some won’t even need loans to finish their acquisition.”
When they acquire resale apartments, as a result, they often spend bigger sums of cash-over-valuation than other buyers do.
Additionally, he reaffirmed that this would result in a moderated demand for HDB resale flats and will keep the price of these flats low, particularly for first-time homebuyers who “may have more immediate housing requirements.”
“The government is still dedicated to maintaining the inclusiveness of public housing as well as its affordability and accessibility for Singaporeans. We will continue to keep a close eye on the real estate market and make necessary adjustments to our rules to ensure that they are always up to date “the authorities guaranteed in their statement that was released on Thursday.
“We strongly advise individuals and families to exercise caution before taking out any additional loans and to determine whether or not they are capable of managing their existing debt before making any long-term financial obligations,”
Even with HDB apartments selling for a million dollars, housing is still within reach of the ordinary individual in Singapore.
The government made an announcement in December on a series of steps that would be used to slow down the private residential and HDB resale markets.
This included increasing the rates of the Additional Buyer’s Stamp Duty (ABSD), decreasing the ceiling on the maximum loan-to-value ratio for loans, and tightening the threshold for the overall debt servicing ratio.
The Additional Buyer’s Stamp Duty (ABSD) rates of 0% and 5% respectively for Singapore citizens and permanent residents who are acquiring their first residential property have not changed. On the other hand, it was made more expensive for those who were purchasing a second, third, or subsequent residential property.
The overall debt servicing ratio threshold was lowered by the government from 60% to 55%, which implies that new mortgages cannot cause borrowers’ total monthly loan repayments to surpass 55% of their monthly income. This measure was part of the government’s effort to tighten lending standards.
Additionally, it has already decreased the maximum LTV allowed for HDB loans, bringing it down from 90% to 85%.
