Taking immediate effect on 30 September 2022, the government announced a new round of property cooling measures. This is the second round of cooling measures following from the first round in December 2021. Since then, HDB Resale Price Index has increased by more than 5% as of 2Q2022. The new round of property cooling measures is intended to encourage sustainable conditions in the heated property market by tightening borrowing and moderating demand.
New Property Cooling Measures In 2022
The latest round of property cooling measures focuses on prudent borrowing and moderating demand from private property owners:
- for housing loans granted by financial institutions, the interest rate floor used to compute the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) is raised by 0.5%
- for housing loans granted by HDB, a new interest rate floor of 3% is used for computing the eligible loan amount
- Loan-to-Value (LTV) limit for HDB housing loans is lowered from 85% to 80%
- wait-out period of 15 months is imposed for private residential property owners (PPOs) and ex-PPOs to buy a non-subsidised HDB resale flat. The wait-out period will not apply to seniors aged 55 and above who are moving from their private property to a 4-room or smaller resale flat.
HDB Home Buyers Have To Make Higher Upfront Downpayment Of At Least 20% Of Property Price
For many first-time HDB home buyers, taking a HDB housing loan allows them to put down less downpayment compared to taking a bank loan. Loan-To-Value (LTV) limit for bank loans is 75% while HDB loan is lower at 85% (previously). This means that they can borrow up to 85% (previously) and pay a downpayment of 15% which can be paid using their CPF OA.
While this is still true, the reduction of the LTV limit for HDB housing loans from 85% to 80% would translate into a higher downpayment needed then before. An HDB resale flat with a valuation of $500,000 would need a minimum downpayment of $100,000 (20% of $500,000), up from $75,000 previously.
For new home buyers, this second round of LTV limit reductions for HDB loan (after the Dec 2021 cooling measures) may be a tough one to swallow, even with substantial housing grants of up to $80,000 under the EHG. Future BTO buyers (i.e., those applying for the upcoming November BTO onwards) will be subject to the new 80% LTV limit.
Complete resale applications (where both seller and buyer’s portion are completed) received by HDB on or after 30 September 2022 are also subject to the revised LTV limit. If your resale application is still in process, and either the buyer or seller portion is still not submitted, you would be subject to the revised LTV.
The Maximum Amount That Property Owners Can Borrow Will Be Reduced
Property buyers are affected by the Total Debt Servicing Ratio (TDSR) for all buyers and Mortgage Servicing Ratio (MSR) for HDB buyers.
While the TDSR and MSR remain at 55% and 30% respectively, the interest rate floor used to compute these ratios are adjusted. This is to reflect the current rising interest rate environment and the expectation that interest rates will remain higher over the medium term.
For TSDR, the medium interest rate is increased by 0.5%:
Source: HDB
While the TDSR ratio has not changed, medium interest rate is used a stress test to determine if borrowers can still maintain the TDSR if interest rate rises to 4%. This means that the maximum that borrowers can borrow will be reduced if they are unable to pass the stress test.
The revised medium-term interest rate floors apply to:
- loans for the purchase of properties where the Option to Purchase (OTP) is granted on or after 30 September 2022, or where there is no OTP, the date of the Sale and Purchase Agreement is on or after 30 September 2022.
- new mortgage equity withdrawal loan applications made on or after 30 September 2022.
Borrowers refinancing owner-occupied property loans will not be affected by this change, while those refinancing other types of property loans will be subject to the prevailing medium-term interest rate that applied when they first took up their loans.
The interest rate floor is introduced for the MSR in this round of property cooling measures. This means that the interest rate used to compute the eligible loan amount for HDB’s concessionary housing loan will be the higher of 3% p.a. or 0.1%-point above the prevailing CPF Ordinary Account (OA) interest rate. The actual interest rate charged remains the same at 2.6%.
For example, assuming you want to take a $300,000 loan from HDB, the actual interest rate charged will be 2.6% which is a monthly repayment of about $1,360. This translates to an income of about $4,530, with 30% MSR. However, HDB will take the interest rate of 3% to compute the monthly repayment of about $1,420 and use it to determine the maximum loan you can borrow under the MSR. Your income would need to be $4730, $200 more than before, to borrow the same amount.
This new interest rate floor will apply for:
Source: HDB
Private Property Owners Will Have To Wait 15-Months Before Buying HDB Flats
To restrain the upward momentum of HDB resale prices, HDB has introduced a wait-out period of 15 months for private residential property owners (PPOs) and ex-PPOs to buy a non-subsidised HDB resale flat. The 30-month wait-out period for PPOs who are first-timers and wish to apply for the CPF Housing Grant and Enhanced CPF Housing Grant for their resale flat purchase remains unchanged.
Previously, private residential property owners (PPOs) and ex-PPOs were allowed to buy a non-subsidised HDB resale flat on the open market, as long as they disposed of their private properties within six months of the HDB flat purchase. This has enabled cash-rich private property owners to fuel the resale HDB market as they are able to immediately buy a resale flat with the proceeds of their private property sale.
To support seniors who are “downgrading” to support their retirement, this 15-month wait-out period does not apply to seniors aged 55 and above (and their spouses) who are moving from their private property to a 4-room or smaller resale flat. Seniors can also continue to buy a 2-room Flexi flat on short lease (if they are aged 55 and above) and Community Care Apartment (if they are aged 65 and above) from HDB without a wait-out period.
However, for private property owners who are in the process of “downgrading”, this may be an unexpected roadblock as they would have to look for temporary housing solutions that can accommodate them for 15 months (on top of the 2 to 3 months needed for HDB completion and another 4 to 6 months for renovations). To help those with financial difficulties or other extenuating circumstances, affected PPOs (regardless of age) can approach HDB for assistance.
Read Also: Guide To HDB 2-Room Short-Lease Flexi Flat For Retirees
HDB Owners Upgrading To A Private Property May Be Affected As Well
Another group of homeowners that may be affected is HDB upgraders. The tightening of interest rate floor for TDSR and MSR will also affect the borrowing ability of HDB homeowners who are hoping to upgrade. The reduction in maximum loan allowed will limit or at least delay the upgrading dreams of these households.
Additionally, a side effect of the 15-month wait-out period is that some of the potential private property sellers may choose not to sell instead, and this will curtail the supply of private properties available for upgraders.
4-Room Flats And Rentals May Be Unexpected Beneficiaries
The 15-month wait-out period may also prop up the rental market as these private property sellers will need an extended interim housing solution. This could easily mean a rental tenancy of 15 to 24 months, accounting for the period need to complete an HDB purchase and renovations. Additionally, because the 15-month wait-out period is waived for seniors who buy a 4-room flat or smaller, it would make 4-room flats more attractive to these buyers.
While this round of property cooling measures seems to be targeted at moderating the demand for resale HDB housing, it does also have some broad-based effect on the overall ability of homeowners to borrow. The introduction of the 15-month wait-out period is also likely to curtail the recent trend of $1-million HDB flats as most of the buyers of these flats would likely to be cash-rich ex-private property owners. As indicated in the government press release, the wait-out period is a temporary measure, and it may be removed in the future. Perhaps, it doesn’t spell the end of $1-million flats, but it does seem to be hitting the brakes on it.
The post New Property Cooling Measures In 2022 And The HDB Buyers, Downgraders & Upgraders Who Could Be Affected By The Latest Property Cooling Measures appeared first on DollarsAndSense.sg.
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