If you were in the process of securing a home loan to finance an upcoming property purchase in 2021, the latest slew of property cooling measures announced by the Government on 15 December 2021 might have got you wondering if the In-Principle Approval (IPA) you obtained earlier has been affected.
The latest property curbs include higher Additional Buyer’s Stamp Duty (ABSD) for subsequent residential purchases, tightened Total Debt Servicing Ratio (TDSR), and lowered HDB Loan-to-Value (LTV) limits. What are the implications of these on your home loan? Is your IPA still valid? Or would you need to reapply for a new one?
In this article, we explain how the new cooling measures affect your IPA, and what you should do if you were informed by your bank that your IPA is no longer valid.
First Things First, What is an IPA?
An In-Principle Approval (IPA) or Approval-in-Principle (AIP) is essentially a non-binding approval from a lender to extend you a home loan. An IPA provides an overview of your borrowing capacity based on your credit history and current financial health. Think of it as a form of communication from the bank on how much they’re able to loan you if you purchase a property within a certain period.
This can be useful to help you make informed and well-thought-out decisions based on your financial situation. Most notably, it helps prevent you from committing to purchase a property that you can’t afford! You don’t want to end up forfeiting your Option-to-Purchase (OTP) fee if you discover that you don’t qualify for the loan for your dream home.
How Do the New Property Cooling Measures Affect Your IPA?
Let’s first touch on one of the legislated cooling measures of the new TDSR limit, and how it consequently affects your IPA.
The new TDSR limits the amount that you’re able to spend on your monthly debt repayments, capping it to the current 55% of your gross monthly income, down from the previous 60%. The more debt obligations (e.g., car loans, personal loans, credit card bills) you have, the less you can borrow from banks for your home loan.
You can calculate your TDSR with the following formula:
(Borrower’s total monthly debt obligations / Borrower’s gross monthly income) x 100%
And so now, how does the new TDSR limit affect your IPA and how much you can borrow to finance your home?
Take for example, if you earn a fixed income of $5,000 per month, and have a total monthly debt obligation of $2,000, your TDSR is 40%. Under the previous TDSR threshold of 60%, you still could borrow $1,000 to finance your home.
Old TDSR Limit of 60%
|Maximum allowed for debt||60% of $5,000 = $3,000|
|What’s left for the home loan||$3,000 – $2,000 = $1,000|
But with the current lowered TDSR ratio to 55%, the maximum that you can borrow to finance your property is $750.
New TDSR Limit of 55%
|Maximum allowed for debt||55% of $5,000 = $2,750|
|What’s left for the home loan||$2,750 – $2,000 = $750|
Based on the lowered monthly repayments you can afford, the total sum of money you can borrow from the bank will be reduced.
What Do These Imply for Your IPA?
You will now need to recalculate how much you can borrow from banks under the new TDSR limits after working out your debt obligations and commitments. This will apply especially if you have other debts and had earlier intended to maximise your TDSR for your upcoming property loan. There is a possibility that you may not be able to afford the same budget now under the tightened limits.
If you’re currently considering to take a step back and have a relook of your finance and property purchasing plans, PropertyGuru Finance has a free online affordability calculator that you can tap on for your budgeting plans.
Estimate what you can comfortably spend on your new home
So, Is Your IPA Still Valid After 15 December 2021?
The short answer is no, your IPA will not be valid if you obtained it before the announcement of the property cooling measures on 15 December 2021. In this case, your bank should have communicated a withdrawal shortly after the announcement.
With the more stringent measures, you’ll need to reapply for a new IPA to reassess your current financial status and situation before securing your next home loan, unfortunately. But the fortunate thing is that you can leave it to the hands of our friendly PropertyGuru Finance mortgage specialists who will handle the paperwork for your next IPA here. Don’t hesitate to speak to our experts today for more home loan recommendations and home financing advice!Chat with us on Whatsapp Fill up an online form
Disclaimer: The information is provided for general information only. PropertyGuru Pte Ltd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.