(This article was last updated as of 8 Jan 2023)

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. That’s even though he got a lower interest rate and he had been steadily paying down on his outstanding mortgage over the past few years.

The culprit here is none other than the application of Income-Weighted Average Age (or IWAA in short) introduced as part of the TDSR (Total Debt Servicing Ratio) framework which all financial institutions will need to comply with since 2013.

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 home 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.

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 (IWAA)	= [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 home loan 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.

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