A few friends of mine recently approached me to buy their 2nd property for investment. Today, let’s talk about the 1st question you should answer for property investment: How big is your purse?
Before starting to look for property unit, you must know how much money you can put on the table, especially, how much bank loan you are eligible to get from a local bank. Otherwise, if you just realized that you wouldn’t be able to get enough money only before signing the Sales & Purchase Agreement, then your previously paid deposit will be forfeited. Painful, right? And the time and effort which have been spent for finding the unit are all wasted.
In Singapore, as Singapore citizens, for your 1st residential property, you are allowed to by HDB unit. But for your 2nd and subsequent residential unit, you are only allowed to buy private properties. For private properties, you can finance your purchase through 3 resources: cash, CPF Ordinary Account savings and bank loan. Cash, of course, is your bank account saving, you know best than others, no need to mention here.
CPF ORDINARY ACCOUNT
How to check my savings in this account? You go on to CPF website: www.cpf.gov.sg, then login with your own SingPass. Then look at
My Statement / Section A / Ordinary Account (OA)
as shown in the following screen shot:
How to know how much loan I can get from the banks? This question is a little bit complicated. Let me explain. When figuring out how much mortgage loan you can get, the banks consider two factors: one is your ability to serve the debt, and another is the value of the property that you are buying.
First, let’s talk about your ability to serve the debt
Your ability to serve the debt is decided by your age and your salary. Let’s put it simple. The basic rule is that, the maximum loan term is 30 years, the loan maturity age can not exceed 65 years old, the interest rate used to calculate the monthly payment must be 3.5%, and your monthly payment for all your debt, including your house loan, car loan, etc., can not exceed 60% of your total monthly home income. This rule is called Total Debt Serving Ratio (TDSR), which is set by MAS in 2013 to prevent property bubble. If husband and wife buying the property together, their wage weighted average age (WWAA) must be used to calculate the maximum loan term.
For instance, the husband is 45 year old, monthly salary is $6000, and the wife, 40 year old, $4000, then, their WWAA is (45 x 6000 + 40 x 4000) / (6000 + 4000) = 43 year old. Suppose they currently don’t have any debt to serve, then according the above TDSR, their maximum loan term is 65 – 43 = 22 years, maximum monthly debt payment amount is (6000 + 4000) x 60% = $6000, based on interest rate of 3.5%, the maximum amount the bank can loan to them is $1,103,591. This amount is called TDSR limit.
Secondly, let talk about the property value
Suppose your first house loan has been paid up, means you currently don’t have house loan to serve, and suppose the new house loan’s term is not longer than 30 years and it will mature on or before you become 65 year old. Then, the ratio of bank loan to property value is capped at 75%. This is called LTV limit, which is also set by MAS in 2013.
In practice, the maximum loan amount you are eligible to get from a bank is capped by your TDSR limit, or your LTV limit, which ever is lower.
Let’s continue the above example. We know the couple’s TDSR limit is $1,103,591. If they are buying a house of $2,000,000, then their LTV limit is $2,000,000 x75% = $1,500,000. So, the bank can loan them $1,103,591. If they are buying a house of $1,000,000, then their LTV limit is $1,000,000 x 75% = $750,000. So, the bank can loan them $750,000.
Therefore, after knowing your TDSR limit, you know your maximum buying power: (TDSR limit + CPF OA amount + cash) is all the money you can put on the table. (But this amount is not the property price you can afford. What you can afford is less than this amount because of the purchasing cost, such as Stamp Duty, Additional Buyer’s Stamp Duty and lawyer fee. We will talk about those in my next article)
Do I have to calculate my TDSR limit by myself?
No necessary. The previous paragraphs is just to explain how banks decide how much loan they will give you. There are some easy ways to know your TDSR limit:
Call banks’ home loan specialists directly, and apply for In Principle Approval (IPA)
To apply for IPA, you need to submit some documents to the bank, including your last year’s Income Tax Assessment, CPF contribution history for last 12 months and salary slips for last few months. If husband and wife are buying the property together, both of them must submit their owner docs. The application is free of charge. The banks normally within one week can email you your IPA, telling your TDSR limit. The IPA valids for 6 months.
According to the transaction procedure which is set by the government, you have to have a IPA in hand before signing a Sales and Purchase Agreement. That means, sooner or later, you got to apply the IPA from a bank. Therefore, it is mostly recommended that you apply for a IPA before you start to looking for a property unit.
Do Online Assessment Yourself
If you temporarily don’t want to call a loan specialist to apply IPA, there are many online websites which can help you to calculate your TDSR limit. We recommend this website from UOB:
Contact me at 9858 9821
If you temporarily don’t want to apply for bank IPA, nor go online for self assessment, never mind, you are welcome to give me a call. I can help you to calculate your TDSR limit in a short while.
In the end, I just want to highlight that, knowing how much bank loan you can get is the important first step you should take, just like before going out shopping, you must remember to check whether you have your purse with you.