After murmurs on the subject have been rippling through the market for weeks, I believe the move to further restrict Mortgage Servicing Ratios (MSR) on private residential property is on the cards over the coming week, possibly as early as tomorrow.
According to multiple sources, MSRs are likely to be brought down from the current 30-60% to just 30-40%. To illustrate what this means in practical terms, let’s take the example of a $1.5M property:-
A $1.5M home with 30-year, 80% loan-to-value housing loan of $1.2M at an interest rate of 1.5%p.a. ($4,141.44 monthly installment) would previously require a monthly income of $10,353.60 to support a 40% MSR threshold. When MSR is reduced to 30%, a corresponding one-third increment is monthly income is necessary to support the same loan.($13,804.80/month). Alternatively, the buyer with a $10,000/mth income would need to reduce his loan to $900K and either come up with more cash or assuming he maintains his cash/CPF downpayment at $300K, shift his sights toward properties $1.2M or below.
In theory, the measures aim to protect borrowers from over-extending themselves. But in practical terms, does it really help people manage their finances better? While I do foresee that some home seekers may reduce their shopping budgets proportionately, I think for most it would be a middle-ground between reducing their budget slightly while also upping their cash/CPF outlay slightly. In that sense, the tighter MSR requirements will force the average private home seeker to lock more cash into their homes. While it’s certainly bad to be over-extended on monthly loan commitments, I believe these can be successfully managed with the help of loan restructuring if need be. The problem of not having sufficient liquid funds to tide one through temporary emergencies is, I think, an even more dangerous problem.
The other danger that tightening MSR for private homes is of course the spillover effect on public housing. Borderline buyers deliberating between private housing or public housing may decide to go for a HDB home once the stringent loan requirements hit their budgets. That is certainly not going to help with ongoing attempts to cool the public housing market. (Since my last post on 28th February that mentioned a 5-year-old flat going for $780 psf, I’ve heard news of a 10-year-old flat around the area same area being sold for $800 psf.)
So does the tightening of MSR on private property loans make sense? If the end-game remains to make things affordable for first-time home buyers, then my answer is no, the move is more hampering than helpful. Speaking from the perspective of a property investor-owner, I am unlikely to part with anything in my existing property portfolio unless it’s an extremely attractive price, since I’ve already maxed out my MSR and will be unable to buy back into the market. That does not bode well for buyers seeking resale homes.