The Monetary Authority of Singapore (MAS) introduced the Total Debt Servicing Ratio (TDSR) framework for all property loans granted by financial institutions (FIs), with effect from 29 June 2013.
In for the kill
Computations of the TDSR affects properties that are residential or non-residential, individuals’ or companies’, new applications or re-financed loans, and in or outside Singapore. Declaration and calculation of incomes and loans are also down to the last detail.
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 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 specifically three main groups of property buyers:
1) Marginal Buyers
– Buyers who are highly leveraged with property or non-property debts
– Buyers’ affordability depends on low interest rate 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
– Buyers who bought properties recently at high price, with low, zero or negative rental return
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
– 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 loading 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 4 years, and decide whether they will be pledged or not for 4 years.
3) Staff in mortgage department
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 familiarize 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, housing loan application is now a long and tedious process.
It is a toil to submit details and proofs 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 installments like electrical appliances, overseas holidays, spa and beauty packages?
Going through all these hassles is the last straw that kills!