In the previous article, we’ve shared a little about one of the cooling measures, the Total Debt Servicing Ratio (TDSR), which was introduced by the government in 2013 to clamp down on speculation in Singapore’s property market.
Apart from TDSR, there’s also the Mortgage Servicing Ratio (MSR). Let’s take a look at what is the MSR and how it affects property buyers.
The Mortgage Servicing Ratio is (MSR) is a regulatory guideline established by the Monetary Authority of Singapore (MAS) to govern the proportion of a borrower’s income that can be used to service monthly mortgage repayments for residential properties. Unlike TDSR, which encompasses all debts, MSR specifically focuses on the portion of the borrower’s gross monthly income that goes towards repaying all property loans, including the one that is being applied for.
MSR stipulates that monthly mortgage repayments for a residential property cannot exceed 30% of the borrower’s gross monthly income. This calculation includes both the principal and interest components of the mortgage.
In short, the general formula that is used to calculate a borrower’s MSR is:
(Monthly repayment instalments for all property loans / Gross monthly Income) x 100% ≤ 30%
Similar to TDSR, lenders are required to incorporate a ‘stress test rate’ to account for potential increases in interest rates when assessing a borrower’s MSR. This ensures that borrowers can afford their mortgage payments even in the event of interest rate hikes or adverse economic conditions.
The difference in MSR is that MSR is applicable to the housing loans for the purchase of a brand new HDB flat, Executive Condominium units from developers, and yet-to-MOP units that are put on the market for sale upon HDB’s approval.
The implementation of MSR has several implications for homebuyers in Singapore:
1. Affordability Check: MSR serves as a crucial affordability check for prospective homebuyers, ensuring that they do not overleverage financially when purchasing residential properties. By capping the percentage of income allocated to mortgage payments, MSR helps prevent borrowers from taking on excessive debt.
2. Housing Options: For homebuyers, particularly first-time buyers or those with moderate incomes, MSR may limit their housing options. Properties with higher selling prices may be out of reach if the monthly mortgage repayments exceed the MSR threshold based on their income. This is very common especially for buyers of EC units from developers, where most buyers would be unable to take the maximum loan of 75% loan-to-value as they are being capped by the 30% MSR, and the current household income ceiling cap of $16,000.
3. Financial Prudence: MSR promotes financial prudence among homebuyers by encouraging them to consider their income levels and affordability before committing to a mortgage. This helps prevent situations where borrowers struggle to meet their monthly payments, reducing the risk of default and foreclosure.
4. Market Stability: Similar to TDSR, MSR contributes to market stability by preventing speculative buying and excessive borrowing. By ensuring that borrowers can afford their mortgage repayments, MSR reduces the likelihood of a housing bubble and promotes a healthy and sustainable property market. The other impact of MSR would most likely be to make sure that flats and EC units offered by HDB remain affordable as well.
The introduction of both TDSR and MSR has successfully stabilized our real estate market since 2013 and effectively slowed down speculative purchases and most importantly, making sure that no property owner is overleveraged and at a risk of defaulting when the market conditions turn against them. The government however will make adjustments as required, based on the market statistics and economic conditions, as we have witnessed more recently, that TDSR was adjust to 55%, down 5% from the previous threshold of 60%.
However, in my personal opinion, the government may have to soon review the Mortgage Servicing Ratio of 30%. Although there’s been an increase in income ceiling, and at the same time, the prices of developer EC units are also much higher than when EC was first introduced to the market, at an income ceiling of $14,000.
Back in 2013, a young couple or a young family would be able to get a decent-sized 3-bedroom unit for an average of $700k. Today, a 936 square foot 3-bedroom unit is selling for at least $1.2million. For the ECs in Bukit Batok, the same unit type is already selling at $1.38million. With a $16k income ceiling, the purchase may have to be a cash-intensive one due to the MSR. The more positive news is that in the current market, the balance EC units are still selling, and we are still witnessing healthy BTO subscription rates.
In conclusion, the MSR helps ensure that homebuyers can make informed and sustainable housing decisions and not overleveraging on their income. While it may pose challenges for some buyers, its long-term benefits contribute to a resilient and thriving property market in Singapore.
