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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 Servicing 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 lock-in or maximum 2 years lock-in so that you can still do a final home loan 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 as refinancing home loan and leverage becomes more complex in Singapore. Talk to us now.

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