Mortgage Servicing Ratio: What You NEED to Know in 2023

It is every person’s dream to own a home. Yet, the dream can prove to be difficult to realise. On 29 September 2022, HDB announced that they’ll be increasing the medium-term interest rate floor used to compute the mortgage servicing ratio (MSR).

Looking for a mortgage service in Singapore and not sure how this will affect your home loan? Not to worry, this is your one-stop shop for knowing everything you need about MSR in Singapore.

What is the Mortgage Servicing Ratio?

According to the Monetary Authority of Singapore (MAS), the MSR is “the portion of a borrower’s gross monthly income that goes towards repaying all property loans, including the loan being applied for”. 

Essentially, it sets a limit on the amount of monthly mortgage repayment that a borrower can have relative to their income. 

Originally, the government set the MSR rate at 40% of monthly income. Then, in January 2013, this rate was lowered to 35%

The limit for bank-issued loans for HDB flats was also set at 30%. The limit for HDB loans was again lowered to 30% in August 2013 and in December of the same year, the government introduced an MSR limit of 30% for ECs as well. 

The result was that virtually all home loans handed out followed the 30% MSR limit. The intent was to protect Singaporeans by ensuring that they did not take out more loans than they could handle.

For HDB flats and executive condominiums (ECs), MSR is currently capped at 30%. For example, if your monthly income is S$6,000, then your monthly debt obligations cannot exceed S$1,800. If the MSR is exceeded, the loan may be rejected by the bank.

With the cooling measures from September 2022, an interest rate floor of 3% is introduced for home loans on HDB and ECs from HDB, which is used to calculate the maximum eligible loan amount. If the loan is being issued by banks, the interest rate floor was raised to 4.0% from 3.5% as well.

Why is the Mortgage Servicing Ratio Important?

Why should we even have the MSR in the first place? Well, there are a few reasons:

Firstly, MSR prevents over-indebtedness. Setting the limit on monthly repayments relative to their income, prevents buyers from becoming over-indebted and unable to repay their financial obligations.

Secondly, it encourages responsible borrowing. Limiting it to 30% of their monthly income reduces the risk of default. This also prevents a cycle of defaults and foreclosures that may negatively impact the economy and the financial stability of the country.

Lastly, MSR affects the affordability of a property. If the MSR is exceeded, homebuyers may need to resort to alternative sources of income or lower the amount of the loan. 

Together with the above, this supports home ownership and promotes a stable and sustainable housing market, which is beneficial for homebuyers, the economy, and the financial stability of the country.

As we can see, while it is rather cumbersome and stressful to factor the MSR into your home-owning aspirations, it is ultimately for the greater good that it is here.

Factors other than Mortgage Servicing Ratio

It may also be worth considering the other factors that go into taking out a loan.

For a bank loan, the medium-term interest rate is used to calculate loan repayments. Furthermore, only 70% of your variable income is taken into consideration. Variable income includes things like bonuses, rent and investments.

On top of this, your financial assets are collateral to the bank for 4 years and the maximum loan tenure is 30 years assuming the maximum loan-to-value ratio amount possible is to be borrowed.

For an HDB loan, things are a little different. The loan is calculated based on the HDB concessionary interest rate (prevailing CPF interest rate plus 0.1% – currently 2.6%). The maximum loan tenure is 25 years, or 65 years minus the buyers’ age, whichever is shorter. 

There is also a loan ceiling of 80% Loan-To-Value limit.

The Loan-To-Value limit is the loan amount as a percentage of the property’s value. For example, if the property’s value is S$800,000, the maximum loan we can take out is S$640,000 (80% for an HDB loan) or S$600,000 (75% for a bank loan).

Exemptions to Keep in Mind About Mortgage Servicing Ratio

If you are refinancing a loan on an HDB flat or EC that you have purchased and stayed in before 12 January 2013 and 10 December 2013 respectively, the MSR does not apply to you.

Wait, doesn’t this sound familiar?

If you were thinking this sounds a lot like the Total Debt Servicing Ratio (TDSR), it is similar but not entirely accurate. 

TDSR is also another cooling measure introduced by the Singapore government to limit individuals from spending too much of their monthly income on debt repayments. 

However, it is calculated differently and applies to different situations.

Their differences are laid out in the table below:

Calculation(Monthly repayment instalments for all property loans / Gross Monthly Income) x 100%(Borrower’s total monthly debt obligations / Borrower’s gross monthly income) x 100%
Applies toHDB Flats and Executive Condominiums from developerAll Properties
OthersOnly takes into account property loansTakes into account other loans

Most of the difference lies in what the loan applies to and takes into account. The TDSR includes in its calculation:

  • Property-related loans, including the loan being applied for
  • Car loans
  • Student loans
  • Renovation loans
  • Credit card loans 
  • Any other secured or unsecured loans, including revolving loans

To sum it up..

We hope that this article has been helpful for you in your decision-making. In 2023, property prices are expected to rise, so it may be better to seize the opportunity now while prices are still relatively lower. 

In the ever-evolving landscape of home loans in Singapore, making informed decisions is key to securing your financial future. 

Our dedicated team of expert advisors is here to guide you every step of the way. Don’t let uncertainty hold you back; take the first step towards achieving your homeownership dreams today. 

Contact us now to schedule a personalised consultation and gain invaluable insights into your home loan options.

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