Allowing young Singaporeans to take out larger loans to finance their housing aspirations

For those under 35, how about a 35-year loan with an 80% loan-to-value ratio?

September 9, 2024



Taking out a loan to purchase a dream home? Interest rates may decrease, and debt financing is readily available. However, the amount that can be borrowed is subject to numerous regulations.

The loan-to-value (LTV) cap for a home loan from a financial institution is 75% for a borrower who does not have any outstanding housing loans. If the loan period exceeds 25 years for Housing and Development Board (HDB) apartments and 30 years for private residences, or if the borrower is older than 65, a reduced LTV limit of 55% is applicable.

At the moment, financial institution loans have a maximum term of 30 years for HDB homes and 35 years for non-HDB homes.

The LTV limit for HDB housing loans was recently reduced from 80% to 75%. 25 years is the maximum loan term. Depending on the age of the borrower and the remaining land lease on the flat, a lower LTV or loan period might be applicable.

Home loan applicants must adhere to the requirements for the total debt servicing ratio (TDSR). The TDSR of a borrower shouldn't be higher than 55%. The amount of a borrower's gross monthly income that is allocated to paying off their monthly debts, including the loan they are applying for, is known as their TDSR.

Additionally, borrowers must adhere to the mortgage service ratio (MSR) cap of 30% of their gross monthly income if they are borrowing to buy a HDB flat or an executive condominium (EC) for which the EC's minimum occupation period has not yet passed.

MSR is the amount of a borrower's gross monthly income that is used to pay back all of their real estate loans, including the one they are applying for.

The strict guidelines ensure that borrowers are not overlevered and that borrowing is done responsibly. As a result, the banking system is strengthened and the housing market becomes more stable.

For young residents purchasing their first homes, housing loan regulations might be loosened.

If a couple exceeds the monthly household income cap of S$14,000 or S$16,000, respectively, they might not be able to purchase a HDB Build-To-Order (BTO) or new EC unit. Alternatively, a couple may require a house for relatively immediate occupancy and thus be unable to wait, say, several years to obtain the keys to their new residence.

A couple may purchase a HDB resale flat in the aforementioned situations. Assuming no financial aid, a couple spending S$900,000 on a four-room flat in a desirable area would need to find at least S$225,000 in savings to cover the cost. The aforementioned couple would have to use at least S$375,000 of their savings to finance a resale condominium that would cost S$1.5 million.

Greater LTV

For home loans from HDB and other financial institutions, the LTV cap for local first-time borrowers under 35 might be increased to 80%. Additionally, these loans may have a maximum duration of 35 years and an LTV cap of 80%.

A buyer of a S$1 million home can use his savings to pay S$50,000 less if the LTV limit is raised to 80% from 75%.

A S$750,000 loan with a 25-year term and an annual interest rate of 3.75 percent has a monthly installment of S$3,856. For a 35-year period, the installment amount drops by roughly 17% to S$3,209.

To put it briefly, a borrower may be better able to satisfy TDSR and MSR requirements and have more money available for other purposes if the loan has a longer term.

Talented young residents can be anchored to their homes by more lenient home loan regulations that assist them in better achieving their housing goals. Additionally, some people may marry younger, have children earlier, and have more children if the stress of home ownership is lessened.

For instance, if they do not require the additional time to save for the down payment on a home, a dating couple who can borrow more to purchase a home might move forward with wedding plans.

Sensible borrowing

However, granting housing loans with an 80 percent LTV gives lenders more leeway when they offer secured financing for assets whose values would need to drop by more than 20 percent to be a cause for concern.

The job market is undoubtedly experiencing significant disruption. Additionally, a borrower's capacity to repay a home loan may be seriously harmed by losing their job. Nonetheless, young workers in particular are in a good position to change course and seek new career opportunities because of the training opportunities available and the increasing educational attainment of the workforce.

Furthermore, as younger borrowers progress in their careers, their income may increase rather quickly. As a result, the capacity to repay a home loan can get better over time. Additionally, borrowers may make early partial loan repayments and possibly repay loans in full before their maturity as incomes increase and savings build up.

Given the rising life expectancy and years of employment, it makes sense to extend a loan with a higher LTV limit until the borrower turns 70. The resident labour force participation rate for people 65 and older increased from 17.6% in 2010 to 31.5% in 2023.

By 2030, Singapore's current retirement age of 63 will increase to 65. By 2030, the reemployment age will be 70. Could the retirement and reemployment ages increase after 2030? Over time, more residents may need to be economically active for longer due to a tight labour market and an ageing population.

In order to maintain price stability and cool the housing market, home loan terms can be tightened. Nonetheless, for many young, first-time homebuyers, having the ability to borrow is essential. As long as there is a sufficient supply, giving them more borrowing flexibility need not jeopardise prudent borrowing or cause the housing market to heat up.

However, if young people are allowed to borrow more to fulfil their housing aspirations, it is hoped that they won't "over-consume" housing.