(F) hands chained: being locked in or tied up in a home loan

Total Debt Servicing Ratio (TDSR)

Total Debt Servicing Ratio (TDSR) has been implemented in Singapore since 29 June 2013 but still here at MortgageWise, we notice many investors and homeowners still have only a vague idea of how it works.

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The rationale for this policy, clearly outlined in MAS press release during its introduction, is two-pronged – first to provide a framework for all financial institutions (FIs) to comply with in order to streamline the credit processing methodology and definitions for example how banks will look at medium age between two joint-borrowers. Second and in a significant move, the central bank now require for all financial institutions to look at a holistic view of a borrower’s total monthly debt obligations as a percentage of his monthly income adjusted down with a safety margin when there are variable components. This marks the dearth of property investment as the favored investment class and tool for wealth creation for many over the years especially in the Asian culture. No longer can one look to speculate or “flip” a property through the use of leverage or mortgage as a quick way of building wealth.

To give you a better understanding of TDSR we summarize below the key thrusts and implementation details of this policy :

1. Effective 29 Jun 2013 MAS requires all FIs to look at total debt of a borrower when assessing for mortgage.

2. In case of more than 1 borrower, FI will look at total aggregated debt over total aggregated income.

3. Aggregated Debt will include :

(a) Monthly repayment of loan applying for to be calculated using 3.5% for residential propertyand 4.5% for non-residential.

(b) Any other mortgage instalment which amount will be apportioned in the case of 3rd party to the loan applied for.

Example

Two friends A & B applies for loan

A has another mortgage with wife C

A earns more than C at ratio of 60:40

A will then need to assign 60% of mthly instalment on his loan with C for TDSR computation. C’s income doc required.

(c) Car loan instalment

(d) Minimum payment on most recent statement for credit card/revolving credit and this apply to all active cards in use.

(e) 20% of the monthly repayment for loan where borrower is a guarantor

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4. Aggregated Income will be defined as:

(a) All income which are fixed like basic pay (employment income) will be taken as 100%.

(b) All income which are variable in nature will need to be applied a hair-cut of 30% and this includes :

– Rental income

– Bonuses

– Director’s Fees

5. Asset-based Lending

In event income above is insufficient, FI is allowed to consider eligible financial assets by “converting” them into income streams for TDSR after applying haircuts of 70% (or 30% if pledged and no haircut if SGD deposits pledged) and recognizing it over a period of 48 months.

Eg. If one has Cash, Deposits (SGD & Foreign), Stocks, Unit Trusts, Structured Deposits worth total $100,000

Additional income added per month : (100%-70%) x $100,000 over 48mths = $625

6. Tenure allowed will be the LOWER of:

(a) Maximum 35 years for private property mortgage (or 30 years for HDB) minus the no of years since date of disbursement of 1st loan for the property, OR

(b) FI’s age limit (usually 75 years) less the Income-Weighted Average Age for the application

Example

A : Husband 40 earns gross $10,000

B : Wife 30 earns gross $5,000

Income-Weighted Ave Age (round-up) = ( 40×10,000 + 30×5,000) / 15,000 = 37

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7. TDSR Exemption (For Refinancing Only)

MAS recognise many investors may already be over 60% TDSR and may face challenges refinancing their loans when interest rises, hence exemption from TDSR for refinancing only was first granted on 10 Feb 2014 and further relaxed on 1 Sep 2016.  The current exemptions are:

(a) For owner-occupied property

Exempted from meeting TDSR as long as borrower pass FI’s credit assessment. (After 1 Sep 2016, property purchase date no longer need to be prior to 29 Jun 2013).

(b) For investment property

Exempted from meeting TDSR as long as borrower pass FI’s credit assessment and also agrees to pay down a minimum of 3% of outstanding loan over a period of 3 years. (After 1 Sep 2016, property purchase date no longer need to be prior to 29 Jun 2013 and this exemption will no longer expire after 30 Jun 2017 which was the deadline set previously).

(*NOTE: It is still up to the individual FI to determine if they will allow the exemption even though MAS has given such exemptions; for example some may set an internal credit guideline whereby borrowers who exceed say 80% TDSR are deemed too “highly-geared” and FI has the right not to accept the refinancing request even though it is an owner-occupied property where TDSR is exempted.)

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