Why Some People Cannot Afford to Buy an EC but Can Afford to Buy a Condo in Today’s Market?

In Singapore’s property landscape, many assume that Executive Condominiums (ECs) are more affordable than private condominiums, given their hybrid nature of being priced between public housing and private properties. However, a curious paradox exists: some buyers find themselves unable to afford an EC but can comfortably purchase a private condo. Why does this happen? The answer lies in the way loans are calculated for these two types of properties.

1. Loan Calculation: MSR vs. TDSR

The key difference boils down to the Mortgage Servicing Ratio (MSR) and the Total Debt Servicing Ratio (TDSR).

MSR for ECs

When purchasing an EC, the loan eligibility is governed by the MSR, which caps the monthly mortgage repayment at 30% of a buyer's gross monthly income. This stricter framework is designed to ensure affordability and financial prudence since ECs are subsidized housing that transitions into private ownership after 10 years.

For instance:

• Monthly household income: $8,000

• MSR cap: 30% of $8,000 = $2,400 for monthly mortgage repayments.

This limit significantly reduces the maximum loan amount that buyers can obtain for an EC.

TDSR for Private Condos

On the other hand, private condos are subjected to the TDSR, which caps the total monthly debt obligations, including the new mortgage, at 55% of a buyer's gross monthly income. This allows buyers with existing loans or other financial obligations more flexibility in their borrowing.

Using the same household income of $8,000:

• TDSR cap: 55% of $8,000 = $4,400 for all monthly debt obligations.

If the buyer has no significant outstanding debts, the mortgage limit for a private condo is much higher than that of an EC.

2. Real-Life Example

Consider the case of Alex and Joanne, a couple with a combined income of $14,000 per month and a loan tenure of 30 years.

Scenario 1: Buying an EC Priced at $1.4 Million

For an EC, their loan eligibility is subject to the MSR, which caps their monthly mortgage repayment at 30% of their gross monthly income.

• MSR limit: 30% of $14,000 = $4,200.

• At a stress test interest rate of 4.5% and a loan tenure of 30 years, the maximum loan amount they can qualify for is approximately $828,917.

• Down payment requirement (25% of $1.4M): $350,000 (5% cash, 20% CPF).

• Loan shortfall ($1.4M - $828,917 - $350,000) : $221,083.

• Total upfront payment required ($350,000 + $221,083): $571,083.

Scenario 2: Buying a Private Condo Priced at $1.8 Million

For a private condo, their loan eligibility is determined by the TDSR, which caps their total monthly debt obligations at 55% of their gross monthly income.

• TDSR limit: 55% of $14,000 = $7,700.

• At a stress test interest rate of 4.5% and a loan tenure of 30 years, they can qualify for a maximum loan amount of approximately $1,519,681.

• Down payment requirement (25% of $1.8M): $450,000 (5% cash, 20% CPF).

• There is no loan shortfall as 75% of $1.8m is $1.35m and they are eligible for a maximum loan amount of $1,519,681.

• Total upfront payment required: $450,000.

3. Additional Factors to Consider

a) Loan Tenure and Age

The age of the buyer also plays a critical role. Loan tenure is generally capped at 65 years minus the buyer’s age. A shorter loan tenure reduces the loan amount eligibility for both ECs and condos but impacts EC buyers more due to the stricter MSR.

b) Interest Rates and Financial Buffers

Both MSR and TDSR calculations account for stress test interest rates, typically 4.5% for residential properties. Buyers must also maintain a financial buffer for unexpected expenses, making affordability a multi-faceted consideration.

4. Implications for Buyers

Understanding the differences in loan calculation is crucial when planning your property purchase. The stricter MSR for ECs can limit your buying power, even if your income appears sufficient. Conversely, the more flexible TDSR for condos allows some buyers to stretch their budgets further, albeit with potentially higher financial risks.

Conclusion

Before deciding on an EC or private condo, it’s vital to assess your financial situation, loan eligibility, and long-term goals. Consulting a property consultant or mortgage advisor can help you navigate these complexities and make an informed decision. Remember, affordability is not just about the property price—it’s about ensuring your financial well-being while achieving your homeownership aspirations.