You will be able to calculate the Mortgage Servicing Ratio for an HDB flat or EC loan.
Farah had a rule of thumb from her parents: never let the housing loan take more than a third of your pay. It turns out the government has a rule along the same lines, written down, and for an HDB flat it is the one that usually sets the limit.
Lesson 4.1, LTV limits and the cash you must put in, capped the loan by the value of the home. This lesson caps it by your income.
The Mortgage Servicing Ratio, or MSR, is the monthly instalment on your property loans as a share of your gross monthly income. A lender may not grant a loan if the instalment would push that share above the cap.
Three words in that definition do the work. Monthly instalment means the payment on the loan you are applying for, plus any other loans on property. Gross means before CPF contributions and tax, so the figure on your contract, not what lands in your bank account. And cap means a hard limit: if the instalment is a dollar over it, the loan is reduced until it fits.
The MSR applies to loans for HDB flats, whether the loan comes from HDB or a bank, and to loans for executive condos bought new from the developer. It doesn't apply to private property or to resale ECs. For those, the limit comes from the Total Debt Servicing Ratio in lesson 4.3. That ratio covers every property loan a bank makes, and a bank loan for an HDB flat is one of them.
So for Farah and Hakim's Bedok flat with a bank loan, both ratios apply, and whichever is stricter sets the limit. For a private condo, only the TDSR would.
The MSR uses gross monthly income, but not every dollar counts the same.
Fixed salary counts in full. Variable income, meaning bonuses, commissions, allowances and overtime, is treated more cautiously. For bank loans, MAS rules have banks apply a discount, called a haircut, to variable income, and to rental income, before counting it. HDB has its own way of assessing income for HDB loans, generally averaging over a recent period. Self-employed income is usually taken from your notices of assessment, averaged and discounted.
In this example, Farah earns a fixed S$5,000 a month. Hakim earns a fixed S$5,500, plus commissions that average S$1,000 a month. With an example haircut of 30% on variable income, the bank counts S$700 of Hakim's commission. Their assessed income is S$5,000 plus S$5,500 plus S$700, which is S$11,200.
For the arithmetic, take an MSR cap of 28%, invented for this example. The current cap is on the HDB and MAS websites.
Multiply the cap by assessed income: 28% of S$11,200 is S$3,136. That is the highest monthly instalment a lender could approve on their HDB flat loan, in this example.
Notice what this number is. It isn't a loan amount, and it isn't what Farah and Hakim will pay. It is a ceiling on the instalment. Lesson 4.3, TDSR and the stress-test interest rate, explains that banks test this instalment at a higher interest rate than the one on your package, and lesson 4.5, Work out your own maximum loan, turns the ceiling into a loan amount.
It also isn't a target. Lenders will lend up to the cap. Whether you should borrow that much is a question about your budget, your emergency fund and your other goals, not about what the rules allow. Farah's parents' third of take-home pay is stricter than most regulatory caps, and many buyers sleep better under a limit of their own like that.
The first is who is on the loan. Apply as two and the lender adds both incomes together. Adding a parent as a co-borrower raises the figure further, but the parent's age and debts come in with the income, which can shorten the tenure and lower the LTV from lesson 4.1. The parent also becomes liable for the loan. Talk all of that through as a family first.
The second is timing. Income figures come from recent months. A job change just before you apply, moving from a fixed salary to commission, or a period of unpaid leave can all lower the income that counts. If you are planning a job move and a home purchase in the same year, it is usually better to let the purchase go first, or to wait until you have a track record in the new job.
The MSR cap and the rules for counting income are published by HDB for HDB loans and by MAS for bank loans. The 28% above was only there to make the arithmetic visible.
Farah and Hakim's result was S$3,136 a month with the invented cap. Theirs is only an illustration. The activity below asks for your own MSR limit in dollars a month, from the current cap and your gross income.
Calculate your MSR limit in dollars per month using the current cap and your gross income.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).