You will build a worksheet that applies LTV, MSR and TDSR to your income and returns your maximum loan and price.
The last four lessons gave Farah and Hakim three separate limits: one from the value of the home, one from their instalment, and one from all their debts. On their own, none of them answered the agent's question from lesson 4.1, "How much is your loan approved for?" This exercise joins them into one worksheet that returns a maximum loan, the rule that sets it and the price it supports. Allow about 35 minutes, with your payslips, a list of your debts and the current MAS and HDB figures open.
Every limit and rate below is invented for the example: an LTV limit of 70%, an MSR cap of 28%, a TDSR cap of 50%, a 30% haircut on variable income and a stress-test rate of 4.5%. Replace each with the current figure from MAS or HDB.
Make an inputs block at the top, with one cell for each of these, and a note of where each figure came from:
Gross fixed monthly income for each borrower, variable income for each, the haircut, the monthly payment on every existing debt, each borrower's age, the loan tenure in years, the LTV limit, the MSR cap, the TDSR cap, and the stress-test rate
Farah and Hakim's inputs: fixed income S$5,000 and S$5,500, Hakim's commission S$1,000, car loan S$650, ages 31 and 33, and a 25-year tenure.
Then a cell for assessed income: fixed income plus variable income after the haircut. For them, that is S$5,000 plus S$5,500 plus S$700, which is S$11,200.
Check the tenure against age before you go further. Banks look at the borrowers' average age, weighted by income, and a loan that runs past a set age gets a lower LTV limit. Their weighted average age is about 32, so a 25-year loan ends in their late fifties. Look up the age and tenure limits that would cut your LTV, and if your plan crosses them, use the lower limit in the LTV cell.
The MSR and TDSR are caps on the monthly instalment, so convert them first.
The MSR instalment is the cap times assessed income: 28% of S$11,200 is S$3,136. The TDSR instalment is the cap times assessed income, minus existing debt payments: 50% of S$11,200 is S$5,600, and taking off the S$650 car loan leaves S$4,950.
Now turn each instalment into a loan amount, using the stress-test rate, because that is the rate the bank tests at. The PV function does it. In most spreadsheets, =PV(4.5%/12, 300, -3136) returns the loan that S$3,136 a month would repay over 300 months at 4.5% a year. For Farah and Hakim, that is about S$564,200 under the MSR and about S$890,600 under the TDSR.
For an HDB flat, both rules apply to a bank loan, so the limit is the lower of the two loans: about S$564,200, set by the MSR. For a private home, only the TDSR applies, so the limit would be about S$890,600.
The LTV limit works the other way round. It doesn't give a loan on its own. It says the loan can be at most 70% of the value. So divide your loan limit by the LTV to find the highest price it supports. For an HDB flat, S$564,200 divided by 0.70 is about S$806,000. For a private home, S$890,600 divided by 0.70 is about S$1.27 million.
Above those prices, the loan you can get stays the same, and every extra dollar of price is extra downpayment. Below them, the LTV limit is the one that bites, and your loan is 70% of the lower of price and valuation.
Write down which rule limits you. For Farah and Hakim it is the MSR for an HDB flat and the TDSR for a condo. That tells them what would move it: for the flat, more income; for the condo, more income or less debt, as lesson 4.4, Variable income, other debts and guarantors shrink your limit, showed.
Now put the plan next to the limits. Farah and Hakim's plan for the Bedok flat was a S$427,000 loan on a S$610,000 valuation. Its instalment at the stress-test rate is S$2,373.40, against an MSR limit of S$3,136. They pass with about S$760 a month to spare, and the price they planned is well under the S$806,000 their income supports.
That spare room is not money to spend. A limit of S$806,000 doesn't mean they should look at flats at that price. It means the rules aren't what holds them back, so their own budget, their cash and the comparison from lesson 1.5, Compare two homes over ten years, decide the price.
If your plan is over your limit, the worksheet shows you by how much, and which rule to work on.
HDB assesses HDB loans itself, with its own income rules and its own way of testing affordability, and states the result in your HDB Flat Eligibility letter. Put that figure beside your worksheet. If you are still deciding between an HDB loan and a bank loan, keep both, since lesson 5.1, HDB loan or bank loan, compares them.
A finished worksheet has a dated inputs block with sources, an MSR and a TDSR instalment, a loan amount for each at the stress-test rate, the lower of the two named as your limit, the price it supports through the LTV, and a line comparing all of this with your plan. Build it with your own numbers in the activity below.
Build the worksheet with your own numbers and write your maximum loan, the rule that limits you and the price it supports.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).