Some of you may have taken out a number of home loans more than 2 years ago prior to the introduction of TDSR (Total Debt Servicing Ratio) on 29 Jun 2013 and as such may find yourself already over the 60% mandatory limit. You may now face some challenges refinancing your home loan when interest rate goes up.

First remember the government has re-iterated in more than a few occasions that TDSR as a policy measure to rein in excessive borrowings by citizens is a structural and is here to stay for good notwithstanding any of the cooling measures being lifted later on at the appropriate time. So how should you now refinance your home loan in view of TDSR going forward, after all mortgages are long term commitments. We hope this article will give you some ideas.

1. Explore Asset-Based Lending (ABL)

By far this is the most common advice given by all bankers and mortgage brokers. And it is also permitted specifically by MAS Notice 645 clause 19 (reproduced below) where it defines what are considered “eligible financial assets” that the central bank allows to be “converted” into a monthly income stream by applying a haircut based on whether the asset is liquid or if it is pledged to the bank or not.

You can see quite clearly MAS considers all stocks, unit trusts, business trusts, debentures or bonds, gold, foreign currency deposits, structured deposits to be liquid assets which can help to boost your monthly income in order to bring down the TDSR.

This is a fairly long list and comes as good news for many who have rightly done portfolio allocation across different asset class like equities, bonds, gold, real estate etc. You are not exactly about to sell these investments away just so to pay down on the loan. MAS now allows you to “show” these eligible financial assets to the banks who are allowed to recognize them as monthly income after taking a 70% haircut and spreading that over a 4-year period of 48 months. Note we are not saying pledging to the bank here which is not what you like to hear; just showing the latest statements of your various holdings to the bank would be fine for most however. However if you like to boost your income further (if your TDSR is too high) you may decide to pledge them to the bank for a 4-year period in which case no haircut of 70% will be taken and this will boost your income substantially.

One simple example is if you should have combined foreign currency deposits and shares amounting to say S$200,000, you will boost your monthly income by :

($200,000 x 30%) divide by 48 months = $1250

And if you decide to pledge the assets here then your monthly income goes up by $200,000/48 (no haircut required) = $4167! This will bring down your TDSR substantially for most people.

One caveat here is even though MAS has allow asset-based lending, it is still very much the call of the individual financial institution to decide which asset to allow and how to go about computing it like exchange rate etc. Also note that in event your assets valuation do fluctuate you will need to build in some buffer as banks will require you to show your assets at two points in time – application and disbursement usually 3 months later. If the stock market goes down and your asset is worth less 3 months later, your loan granted may get cut!

2. Reduce your debt – sell one or some of your properties

We have covered this point in one of our earlier blog articles. Essentially TDSR is debt over income and there are strictly only 2 ways you could reduce it. Either increase the denominator by boosting your income using ABL above, or reduce the numerator by cutting your debt.

And for investors the best way to do that is to seriously take a hard look at which property to hold on to and which one to let go. Ultimately you do need to sell before you can realize any profits from your smart investment made many years ago.

3. Refinance your loan to one with a low Thereafter spread

If you have no plans to sell any of your investment properties as you are keeping them for your retirement income, you may need to just pull all your funds together (maybe even borrowing from friends, families or other sources) for at least a 3-month period to do a one-time ABL and refinance your loan to one with the lowest thereafter spread so you can then do away with the need for constant refinancing. This is especially so if you foresee some changes to your work or career direction and hence your declared income stream. Speak to our experienced mortgage consultant who can guide you on which banks’ home loan deals are most appropriate for this purpose and there are quite a few to choose from at the moment.

Since 2014, MortgageWise.sg has provided thought leadership in the home loans Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to refinance home loan with us in the end notwithstanding the sheer number of brokers and agents out there.