In two days by 30 June, we would have reached the mid-point of the 4-year grace period granted by central bank, with exactly two more years to go before the exemption from TDSR expires on 30 Jun 2017. For those who are deemed already over-stretched by MAS, the word here is to right-size their debts. Since the roll-out of TDSR (Total Debt Servicing Ratio) back in 29 Jun 2013 all banks here are required to ensure a borrowers’ total monthly debt obligations do not exceed 60% of his aggregate monthly income.
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Following feedback from the ground, MAS actually broadens the exemption of TDSR on 10 Feb 2014 to allow those who are already over-stretched to still refinance their home loans subject to certain conditions for their investment properties (mortgages on owner-occupied properties are always exempted from TDSR as long the borrower meets the bank’s requirement for credit approval). These conditions include: the property concerned must be bought before TDSR roll-out on 29 Jun 2013, and investors must agree to pay down a small portion of their outstanding loan when they refinance, typically most banks will ask for 3% of the loan. Some banks will give an interest-free instalment over 24 or 36 months for this extra loan repayment which will be apportioned on a straight-line basis and added to their monthly repayment.
Over at MortgageWise, we see about 1 in 30 or around 3-5% of the our clients with TDSR challenges during refinancing, in fact some actually go past 200% as they are in their golden years after building up a portfolio of properties but now depend very much on their rental income which are also declining. Luckily many have amassed enough eligible financial assets to show to the bank which will help bring down their TDSR in line with the 60% limit.
By then I mean liquid assets like Singapore dollar or foreign currency fixed deposits, stocks and shares, debentures, etc. See our earlier post on what constitutes eligible financial assets and how the bank will apply a standard formula to translate these assets into a “monthly income stream” which brings up your denominator in the TDSR ratio and hence lower it to within 60%. However one would need to have quite substantive assets for that to work and the bank needs to see the assets at two points in time, not just at the application stage. Still the showing of assets or asset-based lending remains by and large the most viable way to pass TDSR, short of selling away the properties.
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Not all borrowers over the 60% limit have the means to do asset-based lending and they will need to do something about their situation before the exemption expires in 2 years. What we observe is that many are unaware that the next round of refinancing of their mortgages is actually very important. This is because by the time the lock-in for their new loan expires which is typically 2 to 3 years later if they take up a fixed rate housing loan, they would have crossed 30 Jun 2017. We have been advising this small group of clients to focus more on the longer term thereafter spread of the loan instead of just going for the lowest fixed rate in the initial few years. They will be wise to take heed. Otherwise they might find themselves stuck with a higher spread like sibor plus 1.25 with the new bank after 2017, unable to refinance or even reprice their loan anymore if the current law does not change.
Understand that the policy intent behind the 4-year exemption given by MAS is that the government wants everyone to bring their TDSR within the 60% limit by 2017 and 4 years is a long enough time to do that it reckons. In fact the surest way to bring down TDSR in a big way is for one to sell away some of his property holdings and the 4-year grace period ties in with Seller Stamp Duty (SSD) so those who are still unable to meet by 30 Jun 2017 could have the last option of selling it after this deadline without incurring SSD. So it may be time for such investors to seriously look at selling, especially those properties which are getting older and more expensive to upkeep, and which also face more uphill task in getting a tenant at good rent.
At MortgageWise, 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 in Singapore when you buy your next property. 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.