New Method of Assessing Loan Eligibility of Buyers of Public Housing in Singapore

In Singapore, public housing usually refers to HDB flats. The term HDB stands for Housing Development Board, which is the statutory body that looks after public housing in Singapore. In other words, these are public housing developed by HDB for the public to own as home.

Over the years, Singapore has been recognised as one of the top few countries in the world that enjoy success in its public housing programme. Currently, more than 80 per cent of the population stays in these flats. Public housing normally conjure up the image of under-maintained flats accompanied by a lack of amenities in the vicnity. In Singapore, HDB flats are located in housing estates that are well-planned with schools, supermarkets, clinics, hawker centres and even sports and recreational facilities. Residents living in these flats normally enjoy a high level of self sustainability.

As Singapore progress in its economic success, the expectation of public housing gets higher and higher. Executive Condominium (ECs) is a type of hybrid between public housing and private housing. Singaporeans who do not want a HDB flat but might find private property too expensive can purchase ECs instead. Worth noting, an EC becomes partially privatised after five years from the date of completion. Hence, EC owners can sell to Singapore Citizens or Permanent Residents after 5 years. An EC become fully privatised after ten years from its completion date. A fully pivatised EC can be sold to Singapore Citizen, Permanent Residents or Foreigners. In other words, Executive Condominium becomes a private property only ten years after completion. Still, this provides a means for aspiring Singapore Citizens and Permanent Residents to own private property.

As land scarce Singapore becomes more developed, the price of land has been increasing. As such the price of such flats and ECs have been climbing north over the last ten years. Buyers of such flats and ECs are usually young couples or young families who just purchase their first home. Their household income is comparatively lower as they have not been working for a long time.

In a move to curb over-borrowing by buyers of HDB flats and ECs, the government introduce the Mortage Service Ratio (MSR) on 12 January 2013. Financial institutions and HDB have to abide by the MSR framework when assessing loan eligibility of these buyers.

When assessing MSR of borrower, financial institutions and HDB have to divide a borrower’s monthly mortgage obligations (including debts secured by property) by their total gross monthly income. For the case of joint borrowers, their combined total monthly mortgage obligations is divided by their combined total gross monthly income. In short, MSR is calculated by the following mathematical formula:

MSR = (Monthly mortgage obligations / Gross monthly income) x 100 per cent

Financial institutions and HDB have to ensure that borrowers do not exceed 30 per cent MSR when granting mortgage to borrowers.

As MSR seems to remain as a mainstay in assessing loan eligibility of borrowers. Borrowers should plan their finances proeprly before applying for mortgage on their flats or Executive Condominiums. From the government’s viewpoint, MSR encourage financial prudence for buyers of such flats and Executive Condominium so that they can borrow within their means.