ticking time bomb for mortgages

TDSR Time Bomb

I think it is apt to do another reminder on this ticking time bomb which will set off in about less than a year’s time by 30 June 2017 – the deadline for all property investors to bring their TDSR (Total Debt Servicing Ratio) down to within 60% failing which there will be no more exemptions for refinancing unless of course the central bank decides to extend this or change the rules somewhat.

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The implication would be property investors finding themselves being unable to refinance to another home loan with lower interest after their fixed rate term ends or where the promotional low rates in the first few years expire. Whether that would lead to an avalanche of investment residential properties for sale in order to offload the mortgage is arguable, but not something totally remote if the Singapore economy does not pick up fast enough against the rest of the global economies.

Just to explain this more clearly, understand that MAS has introduced exemptions back in 2014 where it allowed a grace period of 4 years from the onset of TDSR measures on 29 June 2013. There are broadly two exemptions given: For properties which are owner-occupied, as long as the borrower satisfies the credit assessment of the FIs (Financial Instituions), and the properties are purchased before 29 Jun 2013, they will always be exempted from TDSR 60%. There is no expiry date for this 1st exemption. However for investment properties bought before 29 Jun 2013, MAS determined that 4 years is a long enough time for investors who were already overlimit on TDSR since its inception, to take active measures to pare down their ratio to within 60% by 30 Jun 2017 next year, which includes selling away some of these properties. Hence the 4-year period is carefully chosen which allows even those who bought their investment property late for example just a month prior in May 2013 to still be able to sell them away by Jun 2017 and not having to incur any SSD (Seller Stamp Duty) which lasts 4 years. For this 2nd exemption for investment properties, borrowers would again need to pass the credit assessment of the FIs, and be required as well to pay down a small percentage of the outstanding mortgage normally set at 3% in what is known as DRP (debt reduction plan).

In fact even though MAS allows exemptions for both types of residential properties at the moment, it has left it largely to the individual lenders to decide how much of a risk they would like to stomach. Some clients we spoke with were already having problems with refinancing in past years, as even though MAS allows exemption for owner-occupied homes even if their TDSR were over 60%, banks are rejecting those with unduly high TDSR ratios over a certain threshold set by the banks internally as part of their credit policy. We know local banks probably frown at anything above 80% TDSR which can only be approved on a case-by-case basis.

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With just barely a year to go, what then is the implication for property investors who still fall outside the 60% limit. Those with excessively high TDSR ratio over 80% would seriously need to look at offloading one or some of their investment properties in the next few years. Even though we have only one more year to go, should interest rate environment continue to stay benign to investors into 2017 and beyond, that will be like much welcomed relief to this group who needs to sell.

For those who are keen to hold on to their investment properties, I would say make use of the current softness in interest ratepost-Brexit to quickly switch to a floating rate home loan with the lowest constant spread. There are more stable loan pegs available in the past year with the introduction of DMR (Deposit Mortgage Rate) home loans by 4 banks. And the good news is spreads are coming down somewhat on such DMR loans as banks vie for market share with 1M-SIBOR loans with lowest headline rates at the moment.

No matter whether it is DMR or some might still prefer a more transparent and market-determined SIBOR home loan, the key word here is “constant spread” – the mark-up, or what the lender adds on to the base loan peg, stays the same from year one to the last. For DMR loans this constant spread (or more like mark-up than spread for DMR) could be as low as 1% and for SIBOR loans this could be as low as 0.70%.

For this group of property owners affected by TDSR, we certainly do not recommend fixed rate home loan which by the time the fixed rate term ends, it would certainly cross the deadline of 30 June 2017. They would be left high and dry, unable to refinance home loan which would also by then revert to a much higher interest on a floating rate. The only other option left would be to sell it.

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