Purchasing a property is a long and arduous process comprising many steps. After you find your dream home and have worked out good terms with the owner, it is time to materialise your dreams - or in real terms, actually pay for it.
Unless you come from a background of immeasurable wealth or have scored big in the crypto market, more often than not you might have to take out a loan to pay for your property, or as it is commonly known - a mortgage.
Singapore’s mortgage framework tends to be restrictive, with a plethora of jargon and acronyms commonly being used where taking out a mortgage loan is concerned. To help you best navigate this, we have compiled a glossary of important terms that you should know before you jump right in.
Total Debt Servicing Ratio (TDSR)
TDSR is a restriction, limiting the amount of your gross monthly income that you can spend repaying your monthly debts. This is not restricted to mortgage payments, but for any kind of debt (student loans, car loans, etc).
This value is capped at 55%, meaning that if you are paying off a car that is already taking up 30% of your monthly income, you can only take up a mortgage loan package that is worth 25% of your monthly income!
The purpose of the TDSR framework is to prevent borrowers from assuming excessive debt that surpasses their capacity and to promote responsible lending by financial institutions. It also seeks to ensure borrowers comprehensively assess the genuine financial implications of a mortgage.
Mortgage Servicing Ratio (MSR)
One can think of MSR as a subset of TDSR, applying solely to HDB flats and Executive Condominiums (EC’s) purchased directly from the developer. MSR is capped at 30% of a borrower’s gross monthly income.
This means that even though your other loans might only take up 15 out of the 55% of the TDSR, you are not allowed to take advantage of the full 40% remaining headroom if you were to purchase a HDB, being restricted to the MSR cap of 30%.
Cash Over Valuation (COV)
COV is incurred when the purchase price of a HDB resale flat is higher than the HDB’s actual valuation of the flat - in which the differential is paid in cash.
This COV value contributes to the ABSD that a buyer has to pay, which is included in the final mortgage loan sum.
Loan to Value Ratio (LTV)
LTV is a restriction placed by the Singapore government to limit the maximum amount property buyers can borrow from HDB and banks.
LTV determines the maximum amount of funds you are allowed to borrow, directly affecting the down payment amount needed to be paid upfront in cash or CPF Ordinary Account savings.
The current LTV limit for a HDB loan stands at 80%, and at 75% for a bank loan.
Buyers Stamp Duty and Additional Buyer’s Stamp Duty (BSD, ABSD)
BSD and ABSD are additional duty fees that one has to pay when purchasing a property. This is affected by a multitude of factors, such as the buyer’s nationality and property portfolio.
You can learn more about the calculations for BSD and ABSD here.
The reason why it is important to understand ABSD is because although they are a stamp duty on top of your property price, the value is counted in the overall mortgage loan to be paid. With the high interest rate and ABSD rate environment, this can lead up to a large amount paid over time.
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