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1. Consider monthly repayments of new loan and all other debts.
2. Applies to property loans for Singapore & overseas residential/non-residential properties,
to individuals or entities set up solely to purchase property;
3. Total debt servicing ratio (TDSR) is capped at 60%.
4. Calculate new loan repayments using min 3.5% for residential property loans;
5. All borrowers to be mortgagors (OTP on or after 29 Jun 13);
6. Guarantors to be co-borrowers;
7. For joint borrowings, the income-weighted average age of borrowers to be used;
8. Haircut of at least 30% on variable income & rental; and
9. Haircut on the value of financial assets if used in calculating income.
It’s always a risk letting people manage their own money. Some will save and invest, others will spend their last borrowed cent gold plating the family chihuahua. And the government seems convinced we’re the latter, because Singaporean borrowers now face TDSR:
The Total Debt Servicing Ratio (TDSR) framework is to ensure borrowers aren’t overleveraged (i.e. borrowing like a broke alcoholic in a liquor store). It’s a standard that applies to property loans granted by all financial institutions (FIs)*.
*FIs are not always banks.
TDSR calculates the percentage of your income that can go into servicing your loan. At present, the highest TDSR that FIs are meant to allow is 60%.
That means your housing loan repayments, after adding all your repayment obligations (student loans, credit card debts, car loans, personal loans, etc.), cannot exceed 60% of your income.
You may know the terms Debt Servicing Ratio (DSR) and Mortgage Servicing Ratio (MSR), which seem similar to TDSR. They’re not.
MSR only takes into account your housing loan repayments. So a MSR of 30% means 30% of your monthly income can go into home loan repayments, regardless of what your other repayment obligations are.
Then we have the old standard, DSR. And this is where a lot of you will yell (1) “But DSR already factored in all my debts”, and (2)“Wait a second, 60% TDSR is even more relaxed than the old 50% DSR”.
Wrong on both counts.
(1) DSR didn’t factor in certain unsecured loans, such as credit card debt, and
(2) TDSR is more restrictive than DSR. The method for determining your monthly income and loan repayments are different, as we’ll describe below. Also, the range of debts factored into TDSR are much wider.
There’s more to it than that. I’ll explain these effects as we go along:
If you already have an outstanding home loan (or two), it’s unlikely you can take on another without breaking the 60% TDSR.
Of course, it depends on how high your outstanding home loans are. The point is not so much to prevent you buying (although that’s a partial goal), but to ensure you buy only within your means. We will be exploring other property investment avenues soon, so follow us on Facebook to stay tuned!
Home loans are subject to changing interest rates. So when you take such a loan, the bank doesn’t just use the current rate; they implement a “stress test”, to see if you can handle sudden spikes in interest.
This “stress test” is now standardized at 3.5% for residential properties, and 4.5% for commercial properties.
In other words, home buyers must maintain a TDSR of 60% or under, even if interest rates were to rise to 3.5% (currently, it hovers around 1.7%).
This significantly affects the loan quantum (i.e. the total amount that can be borrowed), even if there’s no outstanding debts.
This is the risk that you won’t be able to refinance into a cheaper loan.
Most home loan interest rates are low for three years, and then go bonkers on the fourth. It’s not impossible to see hikes of one full percent.
At this point, it is (or was) standard practice to switch to another home loan package, with a lower interest rate.
The problem is, a lot of home buyers took their loan packages before the TDSR framework. It was easier to get bigger loans back then.
Should they try to refinance now, they might find they don’t meet the 60% TDSR. These unfortunate people are stuck with their overpriced home loans.
Okay, so TDSR is 60% of your income. But how do you define that income? Not everyone gets a fixed paycheck.
A businessman takes out variable sums from his business, landlords get rent, and salesmen have commissions.
Under the new TDSR framework, that’s lumped under variable income. And FIs are to treat that variable income as though it’s 30% less than it actually is.
So if you’re a business owner making $5,000 a month, your income when calculating your TDSR is just $3,500. That, in turn, means a much lower loan quantum.
Previously, you could stretch your loan tenure by making a joint application with a younger borrower (say, your son).
FIs would just use the age of the youngest applicant. That helped, because a 25 year old can get a 30 year loan tenure, which a 55 year old obviously can’t.
But now, the average age of the borrowers will be used; so a 25 year old and a 55 year old would count as having the collective age of 40.
Also, FIs will only count borrowers with an income. So you can’t be earning nothing, but list yourself as a co-borrower with mum or dad to lower the average age.
What statements do the banks need now? All the statements.
Credit card debts, commissions, student loans, gym memberships, the personal loan you took out to buy a decent Magic deck, all of it. And if you have variable income, you need documentary proof of rent you collect, commissions, fees from clients, etc.
This causes severe complications (e.g. if your clients are in arrears but have collateral, do their fees still count toward your variable income? What about credit cards, if you purposely just pay $50 and not $500 a month?)
Expect interaction with the banks to feel like a marathon Ping Pong tournament from now on.
Computations of the TDSR affects properties that are residential or non-residential, owned individuals or companies, new applications or re-financed loans, and in or outside Singapore. Declaration and calculation of incomes and loans are also now very detailed.
TDSR may be a new term, with explanations in the FAQs of the TDSR unnecessarily long and difficult to read, but they are only additional sub-clauses to address the loopholes of the Loan-to-Value (LTV) limits announced in the previous property cooling measures.
It is also nothing new to see the government once again adopting a “reactive intervention” approach – dispatch general guidelines to the market, then await speculators to circumvent the loopholes, before sending more stringent rules in for the kill.
What are the killers?
There are four major “killers” in the TDSR framework:
1) 60% threshold
Total debt obligations cannot exceed 60% of total income.
2) 30% haircut
There is an arbitrary 30% cut of all variable and rental income, and 30% to 70% cut for the value of eligible financial assets.
3) 3.5% or 4.5% interest rate
Calculate new loan repayments based on medium-term interest rate of 3.5% for residential properties and 4.5% for non-residential properties, or prevailing interest rate, whichever is higher.
4) Income-weighted average age
If a borrower can’t meet the TSDR threshold, the guarantor will be the co-borrower.
Use income-weighted average age of borrowers rather than younger borrower’s age to determine loan tenure.
Who are the targets?
It is clear that the TDSR is meant to target three main groups of property buyers:
1) Marginal Buyers
Buyers who are highly leveraged with property or non-property debts, and buyers whose affordability depends on low interest rates and betting that it won’t go up too fast too soon
2) Multiple Property Buyers
Buyers who are buying their second, third or more properties with high outstanding loans, and buyers who bought properties recently at a high price, with low rental returns.
Note: Once interest rates go up, owners of multiple properties may not be able to refinance or repackage to lower monthly repayment even for the loan of their own residence if they exceed the TDSR threshold.
3) Two generation buyers
Buyers hoping to benefit from a longer loan tenure by putting the loan under a younger joint applicant’s name, and multiple property buyers hoping to benefit from higher LTV with a joint applicant buying for the first time
Message to parents: it’s time we stopped loaning loans on the next generation.
Work that kills
1) Bonus or commission-based jobs
With a 30% cut on variable income, “salarymen” relying heavily on bonus or commission will be at a disadvantage. For instance, salespeople who have the majority or all of their income based on commissions, or senior executives who have a high proportion of their income based on bonuses.
2) Self-employed, unemployed and retirees
They have to declare all their eligible liquid assets or other assets, amortize the value over four years, and decide whether they will be pledged or not for four years.
3) Staff working in mortgage departments
FIs are required to compute the borrowers’ TDSR with a mountain of information:
- Monthly repayments of all property and non-property debt obligations;
- Gross, variable and rental income after haircut; and
- Eligible assets declared with or without pledge.
And all declarations and supporting documents have to be obtained from applicants and validated with relevant parties. Deviations are not allowed since all exceptions have to be granted by the FI’s board of directors and credit committee.
The 60% threshold is just a start to get FIs familiar with the computation of TDSR. The LTV limits are also not permanent. They are to be reviewed over time and revised at any time. That means all calculations are only temporary and may be required to redo all over again.
Imagine the tremendous amount of extra workload added on the housing mortgage department!
4) Housing loan applicants
Before the TDSR rule, housing loan applicants normally take one week to obtain an approval-in-principal. With the new computation of TDSR, applying for a housing loan is now a long and tedious process.
It is a toil to submit details and proof for all property and non-property debt obligations, variable income and eligible financial assets.
Should owners ask tenants to renew their lease well in advance to ensure that the tenancy agreement has a remaining rental period of at least six months?
Should non-property debt loans include, apart from car loans, renovation loans, student loans and credit card loans, all other purchases paid by installment like electrical appliances, overseas holidays, spa and beauty packages?
Last updated by Geoffery Ho Sep 14, 2013.