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.

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)

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?

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 refinance 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 1^stloan 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.