singapore property market

Cooling Measures 2018 And What Now?

By this time all the major news channels have reported on details of the most recent round of cooling measures in 2018 that caught almost everyone off guard including listed developers whose share price tumbled 15-20% the day after.  Indeed no one saw it coming.

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First for benefit of those who haven’t quite figured out what it all means, we gave a brief summary referencing the press release from MAS’ website:

cooling measures 2018 on ABSD

 

property cooling measures 2018

The key changes would be:

  • Loan-to-value (LTV) for residential properties lowered by 5% points across the board. In general, banks can only lend up to maximum 75% of a property’s valuation (this also applies to HDB properties unless the loan is from HDB).  This means that all buyers of residential properties would need to fork out 5% more equity in the form of likely cash, or CPF before they can buy a property.
  • Those buying a 2nd property for investment would need to fork out even more cash, as the additional tax (ABSD) goes up from 7% to 12% for Singaporeans. This means the total stamp duties payable for a 2nd property would be BSD 3-4% plus 12% or almost 15-16%.  BSD (Buyer’s Stamp Duty) has been earlier revised up as well from 3% to 4% for residential properties valued at $1m and above.
  • Those who are thinking of taking out a 2nd mortgage to buy an investment property would have to fork out a bit more cash as that LTV limit has also been cut by 5% from 50% loan previous to 45% now. But this impact will not be that substantial as most who are buying 2nd property as it is now would have already “de-coupled” on their 1st mortgage to get maximum financing.  Still that means 75% loan after today and the cash quantum required has gone up.
  • Developers are hard-hit by double-whammy this time as not only do they need to cough out more cash in terms of land costs for ABSD which has gone up from 15% to 25%, there is an additional new ABSD tax of 5% levied which is “non-remissible”. These measures are clearly designed to mute demand for land aimed squarely at enbloc fervour – the chief driver for the property upswing started since mid of 2017 and which continues to drive the market this year.

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My purpose for writing this blog is not to repeat what is already ubiquitously reported, but to give you our own unique interpretation on this round of cooling measures which many deemed as “too strong a hand” and what are some things you may want to take note of.

Profitting From Capital Appreciation Is Going To Be Harder

The Singapore government has repeatedly stressed that it has no intention to crash the property market, but needs to keep any exuberance in check by ensuring any increases in prices is in keeping with economic fundamentals and conditions and not a result of any speculative bubble.

Most property analysts are of the view that speculative element is largely absent from the market today.  Still, the government has sited in its announcement that it took only 4 quarters for the PPI (Property Price Index) to recover back 9.1% of its total drop of 11.6% in the last 15 quarters or about 3.5 years!  A pictorial view says it best:

PPI property price index singapore 2018 Q2Source: URA website, press release 2018 Q2 flash estimates

 

What this tells us is that no matter how the Singapore property market is going to scale to new heights going forward, whenever price increases go too quickly, regulatory forces would be quite ready to be unleashed and make it snap back to roughly where it started.  This puts a check or a ceiling on price increases.  And objectively speaking, how much more increases can one expect or profit from here?  Take for example, when a new leasehold development in the East like in Siglap is selling at average $2,000-$2,200 psf, how long would it take for the new owner to reap a profit at $2,500 upwards, if it happens.  That would be a scenario when most prime district 9,10 resale properties would be selling at $3,000-3,500 psf and mass market condos would be out of reach of most Singaporeans at $2,000 psf (A typical family 3-bedder of 800 sqft nowadays would cost $1.6m with a loan of $1.2m requiring $400,000 downpayments and to service a monthly repayment of about $5,400 at average 2.50% interest over 25 years).  And new ECs would have to be launched at $1,500 psf!  Most first-timers could only afford a two-bedders.

We have argued in this blog before – property as an investment makes sense when seen more from a financial discipline perspective than capital appreciation perspective in today’s market.  What we mean is – buying a property forces one to direct his hard-earned money into “forced savings” every month by paying down on a mortgage.  In that sense, even when one manages to sell off the asset at the same price as what he paid for at end of servicing the entire mortgage (exclude inflation, taxes paid, and time value of money), he would have saved up a huge nest-egg for retirement.  Otherwise our inate human nature will natural divert our earnings to capital consumption or consumerism, especially in a cosmopolitan city like Singapore.

 

Rental Demand Continues To Be Weak At High Vacancy Rate Above 7%

Ask any leasing agent and they will tell you the typical number of viewings it would take before a unit is successfully let and lament how it used to be half that average number.  At a macro level, URA’s official vacancy rate has stayed stubbornly above 7% since 2014.  Gone are the days when we are used to vacancy rate at halve that number at 3-4% as a base level. Official numbers is that there are 30,000 completed new units that are vacant.  No wonder you still see many “dark” or empty units at night for new developments all over the island.

singapore vacancy rate 2018Source: URA website, press release for market statistics 2018 Q1

 

Now I also suspect, judging from the falling rentals I have seen at most new developments, this vacancy ratio would have been even higher if not for reduced rents over the years.  Ask any landlord and they can also tell you what they used to be able to command as rental income.

The implication here is that location is vital in one’s purchase decision, in order not to get caught in a situation where there is long vacancy period and one needs to dig into his hard-earned money to service the mortgage interest.  And when it comes to letting a unit, understanding the prospective tenant’s profile is important as well as good old factors like proximity to MRT stations and amenities like groceries and food.

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Cost Management Takes On More Significance

Since profiting from capital upside is going to be much harder (we are not saying impossible but it depends on your entry price), cost savings takes on a more integral role in the whole business of property investment.  This is especially true when interest has just started moving up.  3-month SIBOR has hit fresh highs of 1.62% as at 4 July 2018.

Do you work with a professional mortgage consultant who is there to monitor market trends and watch over your back lest you pay a few more hundreds or even thousands a month to make your bank richer?  You will be surprised, especially for loans above $1m, the costs of unnecessary delays in refinancing by a mere one month can come up to quite a bit.  Contact us if you like to start a professional relationship with your own trusted mortgage consultant.

 

De-coupling Of Property Ownership Becomes Norm

Since 2013 when TDSR and tiered-LTV limits came into effect, we have seen a fair number of clients doing de-coupling of the property ownership at the same time when they refinance their mortgage.  This makes perfect sense as de-coupling of a property is done like a sale from one spouse to another and requires full redemption of any existing loan.  It also allows for defraying of some of the high legal costs involved when banks (not all) provide legal subsidy for the refinanced portion of the loan.  Typically, such de-coupling or part-purchase could set one back by $5,500 to $6,000 as you need two sets of lawyers to act.  Being a client of MortgageWise brings you special privileges like a special rate from our partner law firms that is even below market!

Now de-coupling of the mortgage is a lot easier but not many are aware of it.  Once one of the owners’ name is taken out from the loan, it frees him or her up to get a new property at the new reduced 75% LTV as a 1st mortgage even though this is a 2nd property.  However, as that still attracts ABSB which has gone up significantly by 5%, we do not see much benefit in doing just that.

Overall, with the new cooling measures, the concept of de-coupling will become more widespread and gain traction amongst Singaporean property owners going forward.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in 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 work with us in the end notwithstanding the sheer number of brokers and agents out there. See their testimonials.

 

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TDSR changes - property market

TDSR Removed?

Don’t get too excited yet like the stock market, it’s only applicable to those who take an equity term loan of not more than 50% of the current property valuation.  In the same breadth, the three government ministries (MND, MOF and MAS) also announced today some tweaking on the SSD (Seller’s Stamp Duty) from 4 years down to 3 and a reduction of the duties by 4%.  The market is just over-reacting to the sudden news.  And the measures are forward-looking, not back-dated.  It has minimal impact in our view.

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The joint-press release can be found on the ministry’s and here we reproduce the Annex provided within the press release which captures the key changes on SSD:

This is a typical case of “you hear what you want to hear”.  The market and the industry players have been lobbying for several years now for removal or relaxation on some of the “cooling measures” and any slightest move by the government is suddenly taken out of proportion – a knee-jerk response if you like.

In our view, the impact on the latest moves is likely minimal to the market as a whole.  There are really three announcements which the market only got carried away with the first two:

1. Removal Of TDSR For Equity Term Loan Where Loan-To-Value Is Less Than 50%

What is equity term loan (ETL)?  This is strictly not at purchase, but refers to the additional loan that is taken out against the property valuation on the part which has been fully paid for over the years.  And there is a condition – the equity loan portion does not comprise more than 50% of the loan-to-value (LTV).

It is still unclear how the banks will apply this exemption – is it only the equity portion of the loan not to be above 50%?  Or in cases where there is still a housing loan outstanding, for the total housing and the new equity term loan combined not to be over 50%?  From the wordings per se, it seems to suggest the former.

The likely beneficiaries are retirees, which the authorities have indicated as the primary motivation for the change – to help them monetize one of their biggest assets at old age where there is no more or insufficient income to justify for a term loan or even to refinance.  What this means is that those homeowners who have bought properties from a long time ago where the loan has been fully paid down or where there is very little outstanding mortgage, can now look at gearing up for a term loan without the need to show income.

However we think lenders, in particular, credit departments, after being conditioned by TDSR applications since 2013 would most likely remain cautious and might still like to see some income.  Also remember that term loan essentially carry a higher risk to the lender as a 5th charge loan, hence how much of this becoming a benefit to retirees or anyone seeking ETLs with less than 50% LTV, is contingent on how the lenders implement the measures.  And from our experience it would take 3-6 months before we know that.

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2. Tweaking Of Seller’s Stamp Duty

This is positive news for the property market but does not bring about any substantial change as speculative froth has been by and large removed with the last hike on SSD to the current 16% down to 4% since Jan 2011.  No one buys a property now to “flip over” for a profit immediately or in a short time frame.  This reduction of the holding period from 4 years back to 3 years (SSD started in Aug 2010 with 3-year holding period with a tax of 3% down to 1% if one sells within the first year to the end of 3rd year respectively) will not change the mindset.  And the slight reduction of 4% across the respective 3 years holding period will not matter much as well except forced sales where the financial loss will be reduced.

There is also another factor that makes this move a non-event.  It is not across-the-board (or back-dated) but applies only to those who purchase a residential property on and after 11 March 2017.  What this means is that after today, anyone who buys a property could look at selling it with no SSD payable after a holding period of 3 years instead of 4.  The majority of sellers out there who bought their property from 2013 to 2016 would still not be able to sell until they meet the 4-year minimum period in order not to attract SSD.

However one good news is you will likely see more transactions in TOP properties from property launches henceforth as the holding period coincides with the typical 3-year construction period, especially for those who buy at the launch.  The segment of buyers who still believe in price inflation on TOP might want to take advantage of current property market weakness to buy at launches especially when the product is priced correctly.

3. Closing of Loophole For Those Buying Using PHE

We have already explained why the first two measures announced will likely see minimal impact.  What is more interesting to us is the third announcement on how the government will now apply the same taxation rules on ABSD (Additional Buyer’s Stamp Duty), SSD, etc to transactions involving PHE (property-holding entities), essentially closing the loophole for those using property-holding companies to transfer properties, usually the wealthy and those in the property business like developers. A new stamp duty called ACD (Additional Conveyance Duty) will be introduced for this purpose which will be levied on significant owners of equity in both the selling and buying PHEs for such transactions.  More details will be announced.

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Again the impact here is likely restricted to a small group as not many could afford to buy using private limited vehicles which could only get 20% financing for residential property purchase and which also attract the same 15% ABSD  like foreigners.

There is impact though on those already holding such assets in a corporate entity prior to all the rule changes of the past years as they can no longer just sell the assets from company A to company B and pay only 0.2% stamp duty.  It will be interesting to watch how this affects market pricing (if any) especially for those in the property business.

On the whole, we think the announcements today will have minimal impact on the property market.  And TDSR is here to stay.  It is a structural move which the government has re-iterated over the years and will never be removed.  The more significant impact will come only from changes to ABSD or a raising of TDSR threshold currently at 60%.

 

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.

 

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refinance your home loan

TDSR Exemptions Relaxed (1 Sep 2016)

By now most would have heard of the news announced by MAS on Thursday 1 Sep 2016 regarding changes on TDSR exemption. Some mistaken that TDSR (Total Debt Servicing Ratio), as part of the cooling measures introducd by the Singapore government to help contain an overheated property market in recent years, has been lifted. That is not true. The authorities have repeatedly stated that TDSR is structural in nature and will stay on even when all the other cooling measures like ABSD (Additional Buyer’s Stamp Duty), SSD (Seller’s Stamp Duty) and reduced LTV (Loan-to-value) may be lifted progressively over time.

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What Is The Change All About?

There are essentially two key changes. First MAS has now removed the requirement for property purchase date to be before the TDSR introduction date of 29 Jun 2013 for one to enjoy exemption from TDSR currently set at 60%, be it for owner-occupied or investment property.

Second, and more significantly, for investment properties MAS has now removed theticking time bomb” which we have been forewarning in this blog – the deadline of 30 Jun 2017 will be abolished. There is no more deadline. That comes as a huge relief for those servicing mortgages for a few properties and already over the limit of 60% when TDSR came into effect. Previously this group of investors was given a grace period of 4 years to bring their TDSR to within the threshold of 60%. During this time they will be allowed to refinance their mortgage subject to the purchase date before 29 Jun 2013 and that they agree on a Debt Reduction Plan with the new bank. After 30 Jun 2017, they will strictly not be allowed to refinance unless they comply with TDSR which means that some of these investors may be forced to sell off their properties, should interest head north.

With the deadline removed, investors are now free to refinance their existing mortgages whether they bought their properties before or after 29 Jun 2013, and even if their TDSR is over the limit of 60%, as long as they agree to pay down a fixed percentage of their outstanding loan set formally by MAS at no less than 3% of the outstanding loan over a 3-year period. However most people missed one important point which we will explain more below –borrowers will still need to pass the credit assessment of the new bank they apply to for refinancing.

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What Is The Significance?

Going more indepth as usual in this blog, we think the latest move spells some worrying signs ahead.

In its press release, MAS disclosed that about 2.5% of the mortgages out there are over the TDSR limit. It is this 2.5%, set to rise as Singapore faces significant economic headwinds, that is behind why MAS decides to cut investors some slack. It shows even at current low interest rates, more people with multiple properties are finding it difficult to refinance their home loans and are seeking help from the authorities. Bank mortgagee sales are rising steadily. Some might have already lost their jobs and are unable to keep up with their debt olibgations while struggling to find tenants in a rental glut. All eyes will be on interest rate movements going into 2017, and should that pick up significantly the group of investors overstretched will face more difficulties even with this latest reprieve, as refinancing can still mean unaffordable repayments for some. For this group it is important to go with a loan peg that is either fixed or has the least propensity to rise along with market.

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Still the authorities pre-emptive move is laudable. It removes the urgency of a deadline for investors who must sell their properties soon if interest stays up. In fact as SIBOR has come off in rcent months, investors should make use of the current interest rate lull to make their move. Speak to our consultants who can give you the lowdowns on which bank has the best refinancing deal for your situation.

We see less impact to the segment of owner-occupiers many who were already exempted from TDSR. However by removing the purchase date requirement, again MAS recognizes there may be some who met TDSR when they first bought their properties post 29 Jun 2013 but who may now be over the limit with changes in their household income. This group can now heave a sign of relief and move quickly to lock down current low rates for refinancing.

How Will The Lenders Respond?

A lot still depends on how the banks choose to implement the TDSR exemptions. Over the past 2 years we have seen lenders gone more stringent on TDSR exemption – for example even when MAS allows for homeowners over the TDSR limit of 60% to refinance their loan for owner-occupied homes, we know the 3 local banks have internal guidelines that disallow the exemption if TDSR exceeds by too much like over 80%. This is part of the bank’s credit policy. So having the TDSR exemptions now relaxed is one thing, how much leeway the bank will extend to someone who is deemed highly over-leveraged in his or her debt obligations is another. And this is the part that is missed by most in MAS’s announcement – all borrowers will still need to pass the financial institution’s credit assessment. Speak to our consultants if you face such a situation as we may help to navigate this tricky area better than going on your own.

Bottomline, it is still best to exercise prudence and bring down one’s TDSR progressively over time. And planning ahead in terms of having the right documentations certainly help in a big way from our experience assisting our clients. Speak to us today.

 

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.

 

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investment vs own-use property

Investment Vs Own-Use Property

There is only slightly more than a year to the deadline issued by MAS for refinancing of investment property that many are still not aware of.  Whereas there is no end date for exemption of TDSR (Total Debt Servicing Ratio) 60% from refinancing of own-use property as long as the property is bought before 29 Jun 2013, for investment property this exemption expires on 30 Jun 2017 next year.  What this means is that after Jun 2017 for those who are still unable to bring their TDSR down to within 60% of their monthly income, they will strictly not be able to refinance their loan for better rates even if they are willing to pay down a small portion of their outstanding loan (currently that is how the exemption works where banks require such investors to pay down 3% of outstanding before taking over).

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Certainly there are implications for those with more than one property especially when there are economic headwinds ahead with more job losses projected this year.  Or there may be others who have fluctuating income or looking for a change in work environment soon.  Before one makes such a career move, he should take stock of his investment properties and speak to a good mortgage consultant who can better advise on the implications of various policies.  For example on his investment properties he may be better off on a DMR (Deposit Mortgage Rate) home loan rather than a fixed rate mortgage which always end at a much higher floating spread when the fixed term ends, and that is after June 2017.  In this case he should refinance to DMR loan before making any career move that may result in a drop in his monthly income.

There are other things to consider too in terms of mortgage planning for an investment property.  One other obvious factor is the need to retain flexibility of selling out whenever a good offer presents itself.  Hence going on a fixed rate may or may not be a good idea for such properties.  A fixed rate home loan always come with a commitment period or lock-in period during which the borrower will be slapped with a hefty 1.5% penalty (ie. $10,500 on a typical $700,000 loan) if he sells the property and redeems his loan in full.  Of course some might argue that this can easily be absorbed into the sale price by negotiating for slightly more.  Still depending on the purchase price of the investment property, this is akin to paying another stamp duty on exit which all eats into the investor’s profit.

Investment property differs from own-use property in that there is a steady stream of cash flow from rentals to help defray borrowing costs.  In this regard the investor’s main priority is to make sure he manages his cash flow or in other words the “carrying costs” of the property well. There will be less concern on a floating rate interest rate home loan as long as he is able to cover the interest portion of the monthly repayment using his rentals.  Indeed he might want to do his own “stress test” to determine at which point beyond which any further interest hikes might render his position untenable.

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Contrast that with an owner-occupied property where a homeowner pays off every cent of his monthly mortgage using his hard-earned income.   Surely the main priority here would be to reduce the interest costs and pay off the loan in shortest time possible.  There is more reason to go on fixed rate home loan here and do partial repayment before refinancing every time the fixed term ends.  There will also be no issue with a lock-in period for own-use property, or refinancing later on should income varies as the TDSR exemption from MAS has no expiry date for owner-occupied home (bought before June 2013).

DBS has just rolled out new attractive rates for a DMR package with a constant spread which we rate as the best mortgage option for an investment property, or maybe even for owner-occupied homes for some who are looking to sell.  Speak to our consultants today to find out more.

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.

 

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reduce debt to lower TDSR

The Word Is Right-Size

In two days by 30 June, we would have reached the mid-point of the 4-year grace period granted by central bank, with exactly two more years to go before the exemption from TDSR expires on 30 Jun 2017.  For those who are deemed already over-stretched by MAS, the word here is to right-size their debts.  Since the roll-out of TDSR (Total Debt Servicing Ratio) back in 29 Jun 2013 all banks here are required to ensure a borrowers’ total monthly debt obligations do not exceed 60% of his aggregate monthly income.

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Following feedback from the ground, MAS actually broadens the exemption of TDSR on 10 Feb 2014 to allow those who are already over-stretched to still refinance their home loans subject to certain conditions for their investment properties (mortgages on owner-occupied properties are always exempted from TDSR as long the borrower meets the bank’s requirement for credit approval).  These conditions include: the property concerned must be bought before TDSR roll-out on 29 Jun 2013, and investors must agree to pay down a small portion of their outstanding loan when they refinance, typically most banks will ask for 3% of the loan.  Some banks will give an interest-free instalment over 24 or 36 months for this extra loan repayment which will be apportioned on a straight-line basis and added to their monthly repayment.

Over at MortgageWise, we see about 1 in 30 or around 3-5% of the our clients with TDSR challenges during refinancing, in fact some actually go past 200% as they are in their golden years after building up a portfolio of properties but now depend very much on their rental income which are also declining.  Luckily many have amassed enough eligible financial assets to show to the bank which will help bring down their TDSR in line with the 60% limit.

By then I mean liquid assets like Singapore dollar or foreign currency fixed deposits, stocks and shares, debentures, etc.  See our earlier post on what constitutes eligible financial assets and how the bank will apply a standard formula to translate these assets into a “monthly income stream” which brings up your denominator in the TDSR ratio and hence lower it to within 60%.  However one would need to have quite substantive assets for that to work and the bank needs to see the assets at two points in time, not just at the application stage.  Still the showing of assets or asset-based lending remains by and large the most viable way to pass TDSR, short of selling away the properties.

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Not all borrowers over the 60% limit have the means to do asset-based lending and they will need to do something about their situation before the exemption expires in 2 years.  What we observe is that many are unaware that the next round of refinancing of their mortgages is actually very important.  This is because by the time the lock-in for their new loan expires which is typically 2 to 3 years later if they take up a fixed rate housing loan, they would have crossed 30 Jun 2017.  We have been advising this small group of clients to focus more on the longer term thereafter spread of the loan instead of just going for the lowest fixed rate in the initial few years.  They will be wise to take heed.  Otherwise they might find themselves stuck with a higher spread like sibor plus 1.25 with the new bank after 2017, unable to refinance or even reprice their loan anymore if the current law does not change.

Understand that the policy intent behind the 4-year exemption given by MAS is that the government wants everyone to bring their TDSR within the 60% limit by 2017 and 4 years is a long enough time to do that it reckons.  In fact the surest way to bring down TDSR in a big way is for one to sell away some of his property holdings and the 4-year grace period ties in with Seller Stamp Duty (SSD) so those who are still unable to meet by 30 Jun 2017 could have the last option of selling it after this deadline without incurring SSD.  So it may be time for such investors to seriously look at selling, especially those properties which are getting older and more expensive to upkeep, and which also face more uphill task in getting a tenant at good rent.

At MortgageWise, we seek to be your mortgage solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner in Singapore when you buy your next property. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.

 

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strategic planning for refinancing

Mortgage Planning – What To Do Before 2017?

Refinance Or Sell Before June 2017?

In the announcement earlier in the year 10 Feb 2014 where MAS broadens the exemption for TDSR (Total Debt Servcing Ratio), it allows investors a “transaction period” from now to 30 June 2017 to refinance the home loan for their investment property notwithstanding them having exceeded the TDSR ratio of 60% subject to a few conditions :

  • The investment property was purchased before 29 June 2013 (otherwise TDSR would have been in place and they will unlikely be granted a loan above 60% TDSR to buy in the first place)
  • They commit to a debt reduction plan with the bank (at this point this might mean paying off a small portion of the outstanding loan to be refinanced like 3% etc)
  • They pass the bank’s credit assessment

 

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For owner-occupation homes, the exemption from fulfilling TDSR is evergreen – there is no expiry on that and borrowers can sleep soundly knowing they can refinance every 3 years just like in the past, no change.

However for investment property why is there this grace period?

Obviously the thinking behind the central bank’s policy here must be to get everyone to pare down their total debt obligations until it stays within the limit of 60% TDSR at some point.   After all TDSR is a structural change and here to stay for good.

For someone who is already overstretching by this definition having to service for example multiple home loans where all the instalments add up to more than 60% of his monthy income, what are some ways he could slowly reduce his exposure over the next 3 years?

(a)  Sell At Least One Property

The most obvious option. And at MortgageWise we have been advising our clients with more than 2 or 3 mortgages to seriously look at selling at least one of those investment properties especially when :

  • They bought it years ago and the property is still sitting on solid profits despite the generally softer real estate market in 2014.
  • There is still a huge outstanding loan like above 60% Loan-To-Value which will be highly susceptible to the double whammy effect of a rising interest and declining rental yield, a scenario that looks more and more likely now..

Doing this step successfully will bring down a big chunk of debt immediately (TDSR below 60%) allowing one to refinance all the other remaining mortgages. 

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(b)  Be Prepared To Move

Sometimes it is not so easy to sell one of the big ticket property especially in a depressed market like now. Also it may not do justice to one’s overall investment strategy which is to hold and ride out property market cycles and sell the big floorplate unit or luxury property when the market peaks again.

Also with TDSR here to stay, it will be difficult to go back to those days where one can leverage to the maximum 80% for every property purchased over time thereby building up an impressive real estate portfolio for retirement whilst tenants help to pay down the loan for the time being. In other words, selling may be an easy option, but buying back becomes impossible without leverage, even after ABSD has been removed at some stage.

Consider then the very real possibility of moving into such a unit and make that into an owner-occupation property where you can refinance the same way like in the past. Yes to some it may also mean sacrificing a higher rental cashflow. Do your sums and you might achieve higher rental psf on a smaller unit which is also more lettable going forward where many tenant’s budget are cut in the midst of housing over supply.

(c)   Two Chances To Refinance

As we are now about 2.5 years away to 30 June 2017, it means there is likely just one or at most two more refinancing opportunities on MAS exemption of a debt reduction plan with the bank. Plan ahead and make clever use of these two final refinancing opportunities. For example with rates still low, you might want to stay nimble and refinance first to a floating rate package that allows you to reap benefits of low rate, yet with no lockin or maximum 2 years lockin so that you can still do a final refinancing just before June 2017 to a fixed rate package when the rates are finally on its way up.

Try speak to experienced and strategic-minded mortgage planners who can assist you with the right decision and roadmap as refinancing and leverge becomes more complex in Singapore. Talk to us now.

 

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Why You Must Sell Now

Why Some Owners Should Seriously Sell One Property Now

On refinancing I have noticed lately after speaking with some clients how most of them still do not see the real impact of TDSR especially when interest rate “normalize” later (historically in last 20 years 3-month Sibor has been hovering at 4%).  The super and protracted low rate environment of the past 5 years is more an anomaly and most people forget that.

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To illustrate let’s look at the case of Mr Soh (not his real name), a businessman for the last 20 years.

He has 3 properties which he has bought over the years with 3 outstanding mortgages as follows :

PropertyStatusLoan OutstandingOriginal TenureNo of yrs leftCurrent interestMthly Instalmt
Semi-DCurrent Residence$704,00030151.2%p.a.$4200
RivergateRented at $8K pm$1,645,00030251.2%p.a.$6300
Marina Bay ResidencesRented at $10K pm$1,236,00035311.6%p.a.$4300

Mr Soh now 50 years old has bought his landed property 15 years ago and the 2 investment properties were picked up at more recent times at good prices during the Great Recession period in 2009 and 2010.

Back then most banks were left pretty much to themselves to decide how much debt servicing ratio they would accept as “credit-worthy” (mostly in the region of 40-45%) and since by then Mr Soh’s business is earning him a stable income declared as around $20,000 per month, he is deemed good for each of the loan where he applied for up to 80% loan-to-value on the purchase price of the property as each of his instalment was way below the 45% (or $9000) ratio of his monthly income.

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However now we have Total Debt Servicing Ratio (TDSR) which is a big game changer for most people beyond what they realize including Mr Soh.  Banks will now need to look at his entire debt servicing ratio of all his property loans, plus all other debts like car loan and revolving credit if any.  Luckily for Mr Soh he has no other debt besides mortgages as his BMW 7 series and his wife’s Mercedes E class have both been fully paid for.

Let’s look at the impact of TDSR now when he tries to refinance his loan on Marina Bay Residences (MBR) which just got reverted to the higher interest of 1.6% p.a. after 3 years.

Mr Soh draws a fixed gross salary of $10,000 every month from his company, and the rest in director’s fees.  His income for the latest assessment year were as follows :

Employment Income                      = $120,000
Director’s Fees                                  = $60,000
Rental Income (50% share)          = $108,000

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Under the new TDSR framework all variable income needs to undergo a 30% haircut so that will be applied to both his director’s fees and rental income, hence total “qualified income” per month for mortgage application will be =

$120,000 + ($60,000+$108,000) x 70% = $237,600 per annum or $19,800 per month

To refinance his current loan for MBR unit at the best floating rate today of 1.2% p.a. based on his current outstanding of $1.236M, his new tenure can only be 25 years because of his age which will result in a new monthly instalment of $4800.

His Total Debt Servicing per month will now stand at $4200 (Semi-D) +$6300 (Rivergate) +$4800 (MBR) = $15,300.

This will form 77% of his qualified monthly income of $19,800 which means he WILL NOT BE ABLE TO REFINANCE this loan.  He needs to keep his total debt repayments to below 60% of his qualified monthly income of $19,800, ie. below $11,880.

MAS has rightly anticipated the likely plight of many such owners like Mr Soh and has introduced some concessions early this year on 10 Feb 2014 where it allows exemption from TDSR for refinancing cases but only for owner-occupied homes.  Investors who fail to meet TDSR when refinancing one of their investment properties will need to agree with their bank for some debt reduction or paying down of outstanding loan until TDSR 60% is achieved before they could refinance.

Even with the official concession, not all banks will make the exception for owner-occupied homes as MAS leaves it largely to the banks to assess on credit rating and from we know some banks still will not refinance owner-occupied properties for TDSR above 60%.  Be warned.

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What can Mr Soh do now?

Clearly that means he has to sell one of his property to “free up” some quota for TDSR.  So what Mr Soh can do is to consider selling his Rivergate in this case where he bought at around $1600psf back in 2009 and he could still fetch a decent profit at $2000-2100psf even in today’s buyer’s market.  This would then allow him to refinance his loan for MBR as his TDSR will then drop below 60% TDSR to 45% ($4200+$4800 divide by $19,800).

Another strong reason for Mr Soh to do that is also the huge outstanding loan of Rivergate at $1.6M which will drain his cashflow substantially if interest rises up too quickly in the next few years which if he were to sell by then it might be too late as the market may have corrected substantially (inverse to interest rate) and wiped out some if not all his profits above $1600psf.

It is imperative for Mr Soh, and many other owners who have yet to do so especially those with more than 2 properties, to quickly take stock of his TDSR position and determine which property to cash out sooner than later.  Doing so not only ensures maximum profit for owners, but more importantly, allow them to refinance their other mortgages in time to come when interest rises.

 

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Income-Weighted Average Age

Mortgage Loan Tenure Now Affected By Income-Weighted Average Age?

Refinancing one’s home loan every 3-4 years has become such a norm for some people in Singapore that Mr. Lee was caught off-guard recently when he was told by his bank that his monthly instalment will go up by 27% if he decides to proceed with the refinancing even though he got a better interest rate and he has been steadily paying down his outstanding loan with his current bank in the last few years.

What happens here is this new requirement called the Income-Weighted Average Age that all financial institutions will need to comply with since the TDSR (Total Debt Servicing Ratio) was introduced in Singapore 29 June 2013 last year.

 

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To understand this better, let’s take a closer look at how it affects Mr Lee’s case in particular.

Mr Lee is 55 years old this year.  When he took up his current loan ($800K in 2011) to buy an investment property he was then 52, with his wife as joint-owner cum borrower who is 12 years his junior at 40 years of age.  At a floating interest of only 1.2% for the last few years, his monthly repayment has hover around $2600.

However as the interest reverts to a higher rate from this year, he decides to go shopping for another bank to refinance the loan, after all the prevailing floating rate is still low at around 1.3% and he reckons that he would be able to keep to more or less the same monthly repayment.  Mr Lee draws a high monthly gross employment income of $15,000 and would have no problem meeting the TDSR of 60% on his 2 existing mortgages and a car loan.  His wife has been a housewife with no income other than 50% of the rental income she received from this investment property which is now rented out at $3600 per month.

To Mr Lee’s surprise, the new bank has come back with a monthly instalment of almost $3500, 35% higher and would about wipe out all his rental income towards repayment.

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When Mr Lee first apply for his loan in 2011, the bank has conveniently used the age of the younger applicant, in this case his wife at 40, to determine what is the maximum tenure allowed. Most banks in Singapore cap this to the age of 75 years old where one must finish paying off the loan.  For Mr Lee, using his wife’s age, they are technically allowed up to take up 75-40 or 35 years loan tenure but he opted for 30 years instead.

Loan                                  = $800,000
Tenure                              = 30 years
Interest                              = 1.2% p.a.
Monthly Repayment        = $2,648

However when he submits the application for refinancing this year, the new bank is required to use Income-Weighted Average Age to compute the tenure.

Monthly Income for Mr Lee= $15,000 + 70% x $1,800      (haircut of 30% for rental income)
= $16,260
Monthly Income for Mrs Lee= 70% x $1,800
= $1,260
Total Monthly Income= $17,520
Income-weighted Ave Age= [16260 / 17520 x 55yrs old] + [1260 / 17520 x 43yrs old]
= 51.04 + 3.09
= 55     (rounded up)

Using this age to compute the maximum tenure, the Lees are only allowed maximum of 75-55 or 20 years which affects his loan as follows :

Outstanding loan to refinance    = $732,321
Tenure                                             = 20
Interest                                            = 1.3% p.a.
Monthly Repayment                     = $3,466

This new instalment almost takes up his entire rental income of $3600 and Mr Lee has to keep his fingers crossed that interest stays low for a longer period and rentals would bottom out soon, otherwise he would soon find himself in negative cash flow when it comes to rentals albeit he will be paying down his loan much quicker in 21 years from now and hence lesser interest overall.

Still he may decide not to refinance as yet until such time when interest rate spirals out of control in order to keep his monthly instalment manageable.

In conclusion, the income-weighted average age requirement affects the most joint-borrowers with a significant age gap and those who took a much longer tenure in their first loan to begin with, eg. above 30 years.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in 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 work with us in the end notwithstanding the sheer number of brokers and agents out there. See their testimonials.

 

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Refinancing And TDSR

Refinancing Your Home Loan – How Does TDSR Affect You Now?

TDSR or Total Debt Servicing Ratio (currently at 60%) has been introduced in Singapore since 29 June last year in 2013, but still many doubts remain in the minds of home owners as to how it works when it comes to refinancing of one’s existing home loan.

And since TDSR is a structural framework that governs how banks give out loans in Singapore and which will not be lifted even when prices go down later (or up), I thought it will be useful to understand the few immediate implications of this new TDSR rule on refinancing.

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What is TDSR?

First we need to know the concept of TDSR which is simple.  In the past when someone applies for a home loan (or refinance one), the bank looks at only the debt servicing ratio of the applicant (usually in the 45% region) based on that one loan per se, regardless of how many other mortgages or other forms of credit he may already have to service every month.  You can see how that may be unsound as the same person could technically apply to 3 different banks for 3 different mortgages and have his total monthly instalments more than his total monthly income, so long as the banks deemed his credit profile and payment history to be good.  However should things go awry later for example one loses his job or could not find tenants with good rent to help defray his monthly mortgages, one gets into a distressed situation especially when interest rate soars.

This is the exact scenario that MAS wants to circumvent.  Hence the new TDSR rule requires that all banks check and verify that the total debt undertaken by a borrower in terms of his monthly repayment cannot exceed 60% of his income.  Kudos to the central bank which also take the opportunity to straighten out the rules governing loan application across the board so that there is uniformity in the process and no one bank is allowed to “cheat” and make certain concessions to a borrower in order to get his business.  Some of these new rules are :

  • All variable income cannot be taken into consideration in full and must undergo a haircut of 30%.  This covers rental income, bonuses, director’s fees etc
  • Banks can no longer use their own “internal” interest rate (which differs from bank to bank) when they calculate TDSR or how much loan one is eligible up to, but a specific medium term rate at 3.5% for all residential mortgages or 4.5% for non-residential.
  • When there are more than 1 borrower (which is usually the case for husband and wife), no longer can the bank decides freely to use the younger age to determine the maximum tenure.  Instead all banks are required to use an income-weighted age for this purpose which immediately reduces the maximum tenure allowed for some people (most banks do not cross 75years old)

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New Purchase VS Refinancing

Logically speaking those with only one mortgage should not bust the 60% TDSR limit as most banks were using 45% debt-to-income ratio prior to TSDR regime, hence there is still some leeway of 15% to cater for the other loans or credit facilities like monthly repayment for car loan etc.

Those borrowers with more than 1 loan are more likely to be affected by TDSR.  They may have already “overstretched” themselves in the eyes of MAS going above 60% of their income when you aggregate the total monthly repayment across all the different loans.  Or worst still for some people who may now have retired and will no longer have any “proof of income” except for the rentals they are collecting every month which undergoes a 30% haircut.  With a much reduced income they may be way past 60% even though their outstanding loans may have been paid down steadily over the years.  Imagine what happens when interest rate creeps up and their monthly instalment goes up further?

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And that is the exact reason behind the concession introduced by MAS in a subsequent notice this year on 10 Feb when they broadened the exemption of TDSR as follows :

  • Owners who breach TDSR 60% but wish to re-finance the loan on the property that they live in can do so as long as that is a property purchased before TDSR came into play (29 Jun 2013).  By the same token the MSR or Mortgage Servicing Ratio (at 30%) which applies to HDB market, will also be lifted for refinancing of HDB loans as long owners have bought their HDB before the various MSR implementation dates (12 Jan 2013 and 10 Dec 2013 for ECs)
  • For such owner-occupied homes, those who got an earlier loan tenure of more than 30 or 35 years for HDB and private property respectively can still keep to the same original length of tenure calculated from the start of their 1st loan that they are trying to re-finance.
  • However for all investment properties, MAS only allow a grace period of 4 years up to 30 Jun 2017 for re-financing despite breaching TDSR 60% provided 2 conditions are met :

–          The investment property is purchased before 29 Jun 2013

–       The borrower must agree to a debt reduction plan with the new bank who refinanced the loan (subject to bank’s credit approval)

After 30 Jun 2017 there will be no concession allowed on TDSR requirement when it comes to investment properties.

I hope reading this article has helped some of you to understand your situation better when it comes to refinancing of your existing loans in the post-TDSR era.  If you should have more questions for us do not hesitate to call and we are more than glad to be able to shed light on your situation and propose the best course of action, especially when interest is set to rise by early 2015.  Take action now.

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