How the interest rate floor affects your property loans in 2022/23
In the recent September 2022 cooling measures, it was announced that the interest rate floor for home loans would be increased. This has already caused a lot of head-scratching, and you wouldn’t be the first to ask “That means what, exactly?”
To oversimplify a bit, a higher interest rate floor is a loan curb – the government wants us to borrow less. But this leads to a flurry of other questions, like why the rate is not the same as your actual home loan rate. So here at Max Properties, we offer some clarification:
What is the interest rate floor?
Sometimes also called the “stress test” rate, the interest rate floor is used to project your monthly home loan repayment. That means they simulate a higher interest rate than normal, to “test” your ability to pay it back.
Before the September 2022 cooling measures, this interest rate floor would have been 3.5 per cent (for private bank home loans). That was okay at the time, when the home loan rates would only have been two per cent or less.
Unfortunately, home loan rates are now a lot higher, and can climb past three per cent. So now, MAS has announced the interest rate floor would be raised to three per cent for HDB loans, and four per cent for bank loans (up from 3.5 per cent previously).
How the interest rate floor affects your home loan application
When purchasing a private property, one of the crucial factors is the Total Debt Servicing Ratio (TDSR).
The TDSR caps the maximum monthly home loan repayment – inclusive of other debts – to 55 per cent of the borrowers’ monthly income.
For example, consider borrowers who earn $12,000 per month. With a TDSR of 55 per cent, the borrowers’ maximum monthly home loan cannot exceed $6,600.
But if the borrowers have other debts – such as car loan repayments – this will also be factored into the TDSR. For example, having a car loan of $3,000 per month would reduce the maximum home loan repayment to ($6,600 - $3,000) = $3,600 per month.
Now when calculating TDSR, the bank will always use the interest rate floor of four per cent, as mandated in the recent cooling measures.
Our realtors at Max Properties, or a mortgage broker, can always help you look around for lower rates… but while we can save you money this way, even a lower rate won’t help for the specific purpose of your TDSR limit. ☹ The bank must use the four per cent rate to check if you qualify; even if we find you a cheaper rate.
A practical example:
You purchase a private landed property at $4 million, for which your maximum bank loan (75 per cent) is $3 million.
You take a maximum loan tenure of 25 years.
Using the interest rate floor of four per cent, your monthly loan repayment will be projected at around $15,835 (you can use this mortgage calculator to see the numbers).
Given the TDSR limit of 55 per cent, this would require a minimum income of around $28,791 from you and your fellow borrowers (assuming you have no other debts).
This is a headache to calculate!
The numbers can get complex, especially if you are self-employed or rely on rental income. In such cases your income is also assessed differently. Max Properties has consultancy services that can advise on your individual situation.
If you find you’re struggling to with these issues, contact us with your questions so we can help.
A side-note for those buying HDB properties:
For those buying HDB properties, another cap called the Mortgage Servicing Ratio (MSR) also applies. The MSR caps the maximum home loan repayment to 30 per cent of the borrowers’ monthly income, but does not consider other debts.
If you are buying an HDB property with a bank loan, you must meet both the MSR and TDSR. From practical experience servicing many clients, however, we can tell you that if you can meet the MSR, you will probably also meet the TDSR; so long as you don’t have a lot of debts.
The actual HDB loan rate, by the way, is always 0.1 per cent above the current CPF interest rate (2.6 per cent as of 2022).
Practical implications for home buyers
Given the higher interest rate floor, it can be tougher for borrowers to meet TDSR requirements going forward.
The potential difficulty is that, if you cannot meet the TDSR, you will have to find some way to lower the monthly repayment. This can mean stretching out the loan tenure (if possible), or making a bigger down payment (until the monthly loan repayment shrinks to meet the TDSR).
For property buyers who have existing debt – such as car loans or education loans – the higher floor rate may mean they need to pay down such debts first, to meet the TDSR.
There is also an impact on home owners who seek refinancing:
Some home owners may find that, while they qualified for home loans in 2021 or before, they no longer qualify under today’s more requirements. This is because they qualified back when the TDSR limit was higher, and the interest rate floor was set lower.
These owners may be stuck with their existing home loan, or may need to pay down more of their debt before they can refinance.
In a broader sense, the impact is not too deep, and the move is beneficial to the Singapore property market
The current policy tweak is not too severe; it is unlikely that most home owners will struggle with a small 0.5 per cent increase in the floor rate. In most cases, the worst outcome is having to make a bigger down payment.
But the move is beneficial in the broad sense, as home loan rates have been rising across the board. This is due to aggressive Federal rate hikes in the US, as a means to combat rising inflation. As such, a rise in floor rates helps to ensure Singaporeans are not over-leveraged, and that we avoid bubbles and excess volatility in our property market.
If you are concerned about the recent cooling measures, or want a more specific breakdown for your home costs, do reach out to us for a quick chat.
Max Properties SG provides real estate counselling, to ensure you make the most informed choice.