You will be able to explain what lowers your borrowing limit and what you can change before applying.
When Hakim saw that his commissions counted for less than his salary, he was annoyed. He had earned S$1,000 a month in commission on average for three years. To him it was income like any other. To a lender it is income that might not be there next year, and lenders plan for the bad year.
This lesson is about what shrinks your borrowing limit, and which of those things you can change in the months before you apply.
The lender's question is how much of your income it can rely on for twenty-five years. Fixed salary is the most reliable, so it counts in full. Everything else is discounted or averaged.
Bonuses, commissions, allowances and overtime are variable. For bank loans, MAS rules require a haircut before they count. In the example from lesson 4.2, MSR: the cap on instalments for HDB flats and ECs, Hakim's S$1,000 of commission counts as S$700 after an example 30% haircut. With an invented MSR cap of 28%, those missing S$300 a month cost him S$84 a month of instalment room. At an invented stress-test rate of 4.5% over 25 years, that is about S$15,100 less loan.
Self-employed and freelance income is usually taken from your IRAS notices of assessment, averaged over recent years and discounted too. A strong current year counts for less than you hoped if the year before was weak. Rental income from another property is discounted as well.
The banks and HDB each publish how they treat income, and a bank's mortgage specialist will tell you how they would count yours. Ask before you apply.
The Total Debt Servicing Ratio from lesson 4.3, TDSR and the stress-test interest rate, counts every monthly debt payment, and the home loan only gets what is left. So existing debts don't just add to your outgoings. They come off the top of your limit.
Hakim's car loan costs S$650 a month. Under the TDSR, that S$650 comes straight out of the room for a home loan. At the invented stress-test rate, S$650 a month supports about S$116,900 of a 25-year loan. That is how much smaller their TDSR loan limit is because of the car.
Credit cards and credit lines count too. Lenders include a minimum payment on the balances they can see when they assess you, even if you usually clear the card in full. So do personal loans, renovation loans, study loans and any instalment plans the lender can see. Credit and debt: scores, cards, loans and BNPL, lesson 6.1, Put every debt on one page, builds the list you need.
Guaranteeing someone else's loan can also count against you. If you stand as guarantor for a sibling's or parent's loan, the lender may treat part or all of that repayment as yours when it assesses your application. Check with the bank before you agree to guarantee anything in the year you plan to buy.
Here is the arithmetic that surprises people. Freeing S$650 a month of TDSR room by clearing the car loan has the same effect as a pay rise large enough to add S$650 of room. With an invented TDSR cap of 50%, that pay rise would have to be S$1,300 a month in gross pay. Clearing a debt you can afford to clear is often faster than earning your way to the same limit.
But check which rule is actually limiting you before you act. For an HDB flat, the MSR counts only property loans, and in Farah and Hakim's example it is the stricter rule. Clearing the car loan wouldn't raise their HDB flat limit at all. It would matter for a condo, where only the TDSR applies. Paying off a loan early can also cost a penalty, and the cash used is cash you no longer have for the downpayment. Do the sum both ways.
If your income is low but your savings are high, MAS rules let banks count some financial assets towards your income, under conditions. You can show eligible assets such as deposits, shares or bonds, which the bank discounts and then spreads over a set number of months as if they were income. Or you can pledge an amount with the bank for a period, which counts in a similar way. This is common for retirees, the self-employed and buyers between jobs.
The details, including which assets qualify and the discounts that apply, are set by MAS and applied by each bank. If you might use this, ask the bank how it would assess your assets before you rely on it.
The months before an application are when small changes have the most effect. A few that apply to many buyers: let a new job settle so your income has a track record, keep a steady record of commission income, close credit lines you don't use, pay down a small loan if it is the TDSR that limits you, and avoid taking on a new car loan or instalment plan.
Farah and Hakim's list had three items. Hakim's commissions, discounted. The car loan, which didn't affect the HDB limit but would matter for a condo later. And a credit line Farah had opened years ago and never used, which she decided to close. In the activity below, write which of your income and debts would reduce your limit and one change you could make in the next six months.
Write which of your income and debts would reduce your limit and one change you could make in the next six months.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).