ticking time bomb for mortgages

The Ticking Time Bomb Of Mortgages

Last year in this blog we talked about this topic of a deadline of 30 Jun 2017 for all borrowers in Singapore to comply strictly with TDSR (Total Debt Servicing Ratio) of 60%. As we are approaching 2 years to this “ticking time bomb”, it will be apt for me to once again issue another warning so borrowers can “get their act” together and be ready for it.

Who Are The Ones Affected?

This affects people with more than one property. If you only own one property which is likely the roof over your head, then you should be fine in general as long as you do not have a TDSR in excess of 100% for example your household income is $10,000 per month but you have combined monthly repayment obligations of above $20,000 per month from mortgage, car loan, revolving credit and credit card debts.

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The ones most affected are those who bought multiple properties during the last property bull cycle of 2007-2008 or in fact any time pre-TDSR (Jun 2013). Let me explain in the next section.

How Does It Affect You?

TDSR was introduced on 29 Jun 2013 where it stipulates that the total monthly repayments of one’s debt like car loan, credit card rollovers etc including the instalment for the loan to be refinanced calculated at 3.5% for residential properties, cannot exceed 60% of one’s qualified monthly income (with 30% haircut taken off all variable income like rentals, bonuses and commissions).

However after some seven months, the central bank received enough feedback from existing borrowers facing difficulties refinancing their loans to issue an exemption on 10 Feb 2014. In this notice, MAS recognized many in the market have already “overstretched” themselves having committed to mortgages and debts of over 60% through the years. It reasoned that for investment properties one can easily sell them away when refinancing becomes a problem due to TDSR, but the same cannot be said of owner-occupied homes where one will be hesitate to move.

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For this reason, MAS allows a four-year “grace period” for all borrowers to right-size their mortgage commitments either by paying down some of their outstanding loans, or simply selling away their investment properties. This grace period of 4 years also crosses the current regulatory holding period SSD (Seller Stamp Duty) of 4% to 16% is payable if one is to sell a property within 4 years of purchase. After 4 years there will be no more SSD applicable. Hence the grace period is set to end 30 Jun 2017 where the last person to buy a property right on the day just before TDSR became effective in 2013 will have no problem selling this property away after the grace period should he be unable to refinance later on.

In a nutshell the exemption basically allows borrowers to refinance the home loan without the need to fulfill 60% TDSR for their:

  • owner-occupied property and this exemption is for good without expiry so long the property is for own-stay
  • investment properties but subject to a few more conditions :
    • The property must be acquired before 29 Jun 2013 pre-TDSR
    • They agree to pay down a small portion of their loan with their financial institutions (typically 3% of the loan to be refinanced, through servicing higher instalments in the first 3 years)
    • They do this before the grace period ends on 30 Jun 2017

So what happens after 30 Jun 2017 which is just 2 years away? Simply put, unless MAS extends this deadline on lobbying, borrowers will need to strictly comply with TDSR 60% before they are allowed to refinance mortgages for their investment properties. Which also means should interest go much higher by 2018 and borrowers are unable to service the loan or refinance to one with a lower interest, they would have no choice but to sell the property even in a depressed market or face foreclosure actions.

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What Can You Do?

If you are one of those with multiple mortgages from multiple properties and your income has dropped because you have retired, you should take some actions to safeguard yourself against such a scenario.

1. Aim to increase your income or grow your assets

We will cover this as a separate topic later but do know that you could actually translate all your assets like liquid Sing dollar cash savings and even stocks and shares into a monthly income stream using a formula prescribed by the authorities to boost your income.

2. Take decisive actions to cut your debts

Still there is only so much you can cut. The more substantive action here requires you to do step 3 below which is to consider trimming down your real estate portfolio … after all you do need to cash out for profit at some point.

3. Consider selling one or two of your lower-yielding properties

With oversupply situation looming in Singapore, you should aim to keep those properties which are “highly lettable” which usually means proximity to MRT stations and amenities like Mall and eating places etc. To some extent this would also mean the newer condos which most tenants would prefer albeit these are usually smaller in spaces but which also means they should fetch you higher yield per square foot.

Remember the whole idea of real estate investment is leverage, and leverage where you do not need to go into negative cash flow every month – controlling interest and monthly repayment so that the monthly rent would be able to cover your obligations, or at the very least the interest component. Getting rid of low-yielding properties help to this end.

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4. Take advantage of this grace period to do one final refinancing for your investment properties to a home loan with a more stable peg (or index), or one with the lowest thereafter spread for the long term.

This is an important consideration as many do not realize when they refinance to a fixed rate home loan now. The lock-in expires post 30 Jun 2017 and the rate gets reverted to a higher spread and they might not be able to refinance home loan easily if the current rules stay.

At MortgageWise.sg, we seek to be your mortgage solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner when you buy condo Singapore. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.

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