The Mathematical Consideration Of Buying A Property

Mathematical consideration of buying a property

Image Credit: Jorge Franganillo

You could be someone that has made that 1st foray in real estate some years back and is now sitting comfortably on a property that has appreciated.  You pride yourself on that smart decision; regardless whether the property was for investment or if it is still your residential address.  With the currently repressed property market, as a savvy and sophisticated investor, you have the stamina to hold on to your current property/properties but you do not want to lose out on the opportunity to ‘buy low’ as they say at this point.  You want to get your hands on your next property.

Why not?  Home values dropped for a ninth quarter in the last three months of 2015, posting the longest losing streak in 17 years, and last year’s sales are set to be the lowest in seven years.  The view forward doesn’t look like prices are going to rebound as well.  According to investment management firm JLL, residential property prices in Singapore could fall by 4 to 6% a quarter, going by past correlation studies with the stock market. As property prices typically lags the stock market by one or two quarters, a further correction in property prices in the next few months is not unexpected.

To top it all,  cooling measures seem to be here to stay for a while.  What is important for you is that prices look affordable and attractive to make an entry into the property market.  However, although you are familiar with the theoretical aspect of the cooling measures, you may not truly understand how far reaching they are. Thus they may face obstacles in getting that loan approved or lacking adequate collaterals and securitisation.

The worst case scenario is to be caught in a situation where you have the financial means but you are still face with problems buying another property as you have difficulty getting a loan.

Let us go take a deeper dive.

The 1st Consideration – Additional Buyer’s Stamp Duty (ABSD)

This was first announced in 2011 and revised on 12 Jan 2013. As but a small factor of the bigger cooling measures equation, this was introduced to slow the growth of the property market. It is a tax payable on top of the normal Buyers Stamp Duty when you purchase or acquire a residential property i.e. applicable to both HDB flats and Private Properties.  This has significantly increased the initial capital outlay when you are purchasing your 2nd and subsequent properties.  One important point to note that if a Singaporean purchases the property with a PR or foreigner, the higher rate will apply.

The 2nd Consideration – LTV (Loan To Value)

Otherwise known as the housing loan quantum a bank or financial institution is willing offer as a percentage to the valuation of the property in question.  Again, this was not spared from the far reaching impact of the cooling measures to curb property speculation  and prices.

Here is what it looks like before and after the cooling measures (taken from Monetary Authority of Singapore)

Highlights are:

  • All residential property loans will now only allow a maximum loan tenure of 35 years
  • If you take up a loan of more than 30 years or if it extends past the age of 65, you can either
    • borrow up to 60% of property value if you do not have an existing housing loan
    • borrow up to 40% of property value if you have an existing housing loan
  • The same rulings will be applied to refinancing residential properties
  • Non-individual borrowers will now have a cap of 40% LTV

We have not taken property valuation into consideration.  With a conservative approach adopted by property valuers these days, the cash portion to be paid upfront will also be significantly increased if the valuation does not meet the purchase price adding to the burden of an already reduced LTV.

ABSD and LTV are but only 2 of the 4 cooling measures the government has introduced to curb property prices and speculation.  Some may argue that it has worked too well.

The other 2 components of the cooling measures are:

  • TDSR – Total Debt Servicing Ratio
  • MSR – Mortgage Servicing Ratio

3rd Consideration – TDSR (Total Debt Servicing Ratio)

It is not easy to understand the working of the TDSR first time around, especially for first time applicants of mortgage loans.  However, the objective of the TDSR is to prevent an individual from being overextended because of a property purchase.  Whether the property is for investment purposes or for owner occupation, it is to safeguard you from purchasing a property that is above your means.

Translating this measure into facts and figures, we just have to remember this magic formula:

Total commitment / Total income <= 60%

4th Consideration MSR (Mortgage Servicing Ratio)

MSR caps the amount an individual can spend on mortgage repayments to 30% of a borrower’s gross monthly income (excluding other commitments) and it comes into effect on 12 Jan 2013.  Unlike the TDSR, which is applicable to all housing loans, MSR applies to HDB flats and ECs (Executive Condominiums), including the refinancing of these loans.

After which, they also have to fulfil the TDSR assessment of 60% where all commitments will be included.

The logic of these measures are simple but the impact to you as a property investor is greater than a straight forward mathematical question.  The sum of these is far greater than the parts put together.

Eugene Huang

Eugene Huang

As the director of Redbrick Mortgage Advisory, Eugene believes that there should be an eco-system in which all parties of the mortgage industry can co-exists to facilitate a meaningful and profitable value chain. He has personally structured mortgages with more than SGD 1 billion in total value during his stint in a multinational offshore bank in Singapore.
Eugene Huang