Today we’re here to talk about the F word: Finances (what were you thinking?).
Specifically, if you’re planning to take a HDB housing loan to finance your HDB flat purchase.
Step one: the HDB Loan Eligibility (HLE) letter
Step one is always the most important step. Regardless of whether it’s a BTO or a resale flat, you’ll first need a HDB Loan Eligibility (HLE) letter.
What is HLE?
This HLE letter is basically a statement by HDB saying that they’ll lend you a given sum of money to buy your HDB flat.
Before you apply for your HLE letter, you’ll have to assess your eligibility and how much you’re able to borrow:
To be able to qualify for a HDB loan, you have to meet these eligibility conditions:
- At least one buyer is a Singapore citizen
- You haven’t taken more than 1 HDB housing loan in the past; if you’ve previously taken a HDB loan, your last owned property cannot be a private residential property, local or overseas
- You don’t own or haven’t disposed of any private residential property in the 30 months before you apply for your HDB loan
- Your average gross monthly household income doesn’t exceed $14,000 for families, $21,000 for extended families or $7,000 for singles
The HDB flat you’re buying has at least 20 years left on its lease
As for how much you’ll be able to borrow, this depends on your financial health and credit score.
If all’s good and you didn’t just check your bank account and think “omg I’m damn broke”, the loan amount will be capped according to any one of these 3 limits, whichever is lowest:
- Loan-to-value limit (LTV limit)
- Mortgage servicing ratio (MSR)
- Total debt servicing ratio (TDSR)
Loan-to-value limit (LTV limit)
Your LTV limit is the maximum percentage of your property’s value you’re allowed to pay off with a loan. This is normally 90% of your property’s value, as long as the remaining lease of the flat you’re buying is enough to cover you to at least 95 years of age.
Basically, if you’re applying for BTO, your LTV limit will definitely be 90% since your BTO flat will come with a fresh 99-year lease; unless you’re buying a super old HDB flat, you can safely assume your LTV limit to be 90%.
If not, you can still get a HDB loan, but your LTV limit will be pro-rated accordingly.
TBH, can just use calculator
Thankfully, it’s 2019 and we have apps for everything, so of course there’s a HDB Loan LTV Limit Calculator to save you from doing the math.
But if you want to really understand how it works, there’ll be a little brainwork involved, but stay with us! We promise we’ve made it as simple as possible:
If the remaining lease of the HDB flat can cover the youngest buyer to at least 95 years of age, your LTV limit will be 90%.
For instance, a couple aged 30 and 28 are looking to buy a $500,000 resale HDB flat with 80 more years on the lease i.e. the flat’s lease won’t expire before the 28-year-old, the younger of the two, reaches 95 years of age.
In this case, their LTV limit will be 90% x $500,000 = $450,000.
Since the remaining $50,000 isn’t covered by their HDB loan, it’ll have to be paid upfront.
If the remaining lease of the HDB flat cannot cover the youngest buyer to at least 95 years of age, the LTV limit will be pro-rated according to this formula:
90% x [remaining lease of flat – 20]/[95 – age of youngest buyer – 20]
For instance, if the same couple, aged 30 and 28, are looking to buy a $500,000 resale HDB flat with only 60 more years on the lease, the flat’s lease will expire before the 28-year-old reaches 95 years of age.
Following the formula, the pro-rated LTV limit will be 90% x [60-20]/[28-20] = 77%
They’ll be able to take a maximum HDB loan of 77% x $500,000 = $385,000, and pay the remaining $115,000 upfront.
Mortgage servicing ratio (MSR)
The MSR imposes that you can only use up to 30% of your income to pay off your home loan.
Bearing in mind that the maximum loan tenure for a HDB loan is 25 years, the calculation is relatively straightforward (phew).
Suppose you and your partner have a joint gross monthly income of $4,500. Your MSR will be:
(30% of $4,500) x 12 months x 25 years = $405,000
For variable income – for instance, you earn based on commissions, or you’re a #woke freelancer – the MSR will be calculated based on only 70% of your average monthly income over the last 6 months.
Let’s say you have a basic salary of $1,500 a month as a salesperson, and you’re averaging $3,000 in commissions. Although you’re raking home a good $4,500 every month, your income will be calculated as:
$1,500 + (70% of $3,000) = $3,600
This means your MSR will be:
(30% of $3,600) x 12 months x 25 years = $324,000
Total Debt Servicing Ratio (TDSR)
So many different terms! But the good news is that if you’re debt-free, this doesn’t apply to you. One less something-something-ratio to know about.
The TDSR imposes that no more than 60% of your gross monthly income should go towards paying off debts.
This includes not only your home loan, but also other existing debts like your car loans, and even anything you put on instalment on your credit card.
So if you’re earning a fixed income of $4,500 a month, your TDSR will be:
60% of $4,500 = $2,700
If, for instance, you already have a monthly debt of $1,500 to repay, you can only take up a HDB loan with a maximum of $1,200 monthly repayment.
Assuming you take up this HDB loan for the full 25-year tenure, the maximum you’ll be able to borrow will be:
$1,200 x 12 months x 25 years = $360,000
Again, like the MSR, only 70% of your variable income will count towards the TDSR.
How to apply for a HLE letter
Ok, now we’ve got all the math out of the way.
Apply for your HLE letter via the HDB website. You’ll be asked for some of your particulars as well as documents to prove your income, such as your payslip or a record of your CPF contribution history.
Indicate the loan amount you intend to take, and if your financial health and eligibility is all good, you can be pretty sure it’ll all go according to plan.
As for when to apply for your HLE letter, time it accordingly: The application takes about 2 weeks from start to finish, so apply in advance before you seal the deal for your HDB flat.
Once the application is completed, you can retrieve a copy of the HLE letter here; or if you’re curious/ kanchiong, you can also check on the status of your HLE application via this same portal.
The HLE letter will be valid for 6 months from the date of issue. You’ll need this when you:
Buy a resale HDB flat
Very straightforward. Once you’ve found The One and decide to purchase it, produce your HLE letter to obtain your HDB loan.
Book your BTO flat
They say successfully getting a BTO flat is like striking property lottery. If this is you, CONGRATS!!!
So, back to the point, you’ll be required to submit a HLE letter when you book your BTO flat. During this period of time, though, you’ll only have to foot the downpayment (~10% of the purchase price) and miscellaneous fees.
When your BTO flat is finally ready and you get to collect your keys, you’ll have to pay for the balance of the purchase price, which is when you’ll have to take up your HDB loan.
But this will be at least 2 years later, and by then, your initial HLE letter would no longer be valid.
Instead, you’re required to apply for a second HLE letter. This is equally important as the first letter! Make sure you’re still financial able to service the HDB loan so that your application will be successful.
If, for some reason, your second HLE letter promises a smaller loan amount than the first, you’ll have to either top up the remainder via cash or CPF, or take up a bank loan instead (or forfeit your BTO flat, but touch wood!).
Getting your HDB loan with your HLE letter
Your HDB loan can be repaid via cash or CPF (find out more on the HDB website).
As draining as planning your finances may be, it’s equally important as finding your dream home.
And now that you’re more familiar with the HLE and HDB loan process, we won’t distract you from the fun part: Go forth and house-hunt!