On home loan refinancing I have noticed lately after speaking with some clients how most of them still do not see the real impact of TDSR especially when interest rate “normalise” later (historically in last 20 years 3-month Sibor has been hovering at 4%).  The super and protracted low rate environment of the past 5 years is more an anomaly and most people forget that.

To illustrate let’s look at the case of Mr Soh (not his real name), a businessman for the last 20 years.

He has 3 properties which he has bought over the years with 3 outstanding mortgages as follows :

Property	Status	Loan Outstanding	Original Tenure	No of yrs left	Current interest	Mthly Instalmt
Semi-D	Current Residence	$704,000	30	15	1.2%p.a.	$4200
Rivergate	Rented at $8K pm	$1,645,000	30	25	1.2%p.a.	$6300
Marina Bay Residences	Rented at $10K pm	$1,236,000	35	31	1.6%p.a.	$4300

Mr Soh now 50 years old has bought his landed property 15 years ago and the 2 investment properties were picked up at more recent times at good prices during the Great Recession period in 2009 and 2010.

Back then most banks were left pretty much to themselves to decide how much debt servicing ratio they would accept as “credit-worthy” (mostly in the region of 40-45%) and since by then Mr Soh’s business is earning him a stable income declared as around $20,000 per month, he is deemed good for each of the loan where he applied for up to 80% loan-to-value on the purchase price of the property as each of his instalment was way below the 45% (or $9000) ratio of his monthly income.

However now we have Total Debt Servicing Ratio (TDSR) which is a big game changer for most people beyond what they realize including Mr Soh.  Banks will now need to look at his entire debt servicing ratio of all his property loans, plus all other debts like car loan and revolving credit if any.  Luckily for Mr Soh he has no other debt besides mortgages as his BMW 7 series and his wife’s Mercedes E class have both been fully paid for.

Let’s look at the impact of TDSR now when he tries to refinance his home loan on Marina Bay Residences (MBR) which just got reverted to the higher interest of 1.6% p.a. after 3 years.

Mr Soh draws a fixed gross salary of $10,000 every month from his company, and the rest in director’s fees.  His income for the latest assessment year were as follows :

Employment Income                      = $120,000
Director’s Fees                                  = $60,000
Rental Income (50% share)          = $108,000

Under the new TDSR framework all variable income needs to undergo a 30% haircut so that will be applied to both his director’s fees and rental income, hence total “qualified income” per month for mortgage application will be =

$120,000 + ($60,000+$108,000) x 70% = $237,600 per annum or $19,800 per month

To refinance his current loan for MBR unit at the best floating rate today of 1.2% p.a. based on his current outstanding of $1.236M, his new tenure can only be 25 years because of his age which will result in a new monthly instalment of $4800.

His Total Debt Servicing per month will now stand at $4200 (Semi-D) +$6300 (Rivergate) +$4800 (MBR) = $15,300.

This will form 77% of his qualified monthly income of $19,800 which means he WILL NOT BE ABLE TO REFINANCE this loan.  He needs to keep his total debt repayments to below 60% of his qualified monthly income of $19,800, ie. below $11,880.

MAS has rightly anticipated the likely plight of many such owners like Mr Soh and has introduced some concessions early this year on 10 Feb 2014 where it allows exemption from TDSR for refinancing cases but only for owner-occupied homes. Investors who fail to meet TDSR when refinancing one of their investment properties will need to agree with their bank for some debt reduction or paying down of outstanding loan until TDSR 60% is achieved before they could refinance.

Even with the official concession, not all banks will make the exception for owner-occupied homes as MAS leaves it largely to the banks to assess on credit rating and from we know some banks still will not refinance owner-occupied properties for TDSR above 60%.  Be warned.

What can Mr Soh do now?

Clearly that means he has to sell one of his property to “free up” some quota for TDSR.  So what Mr Soh can do is to consider selling his Rivergate in this case where he bought at around $1600psf back in 2009 and he could still fetch a decent profit at $2000-2100psf even in today’s buyer’s market.  This would then allow him to refinance his home loan for MBR as his TDSR will then drop below 60% TDSR to 45% ($4200+$4800 divide by $19,800).

Another strong reason for Mr Soh to do that is also the huge outstanding loan of Rivergate at $1.6M which will drain his cashflow substantially if interest rises up too quickly in the next few years which if he were to sell by then it might be too late as the market may have corrected substantially (inverse to interest rate) and wiped out some if not all his profits above $1600psf.

It is imperative for Mr Soh, and many other owners who have yet to do so especially those with more than 2 properties, to quickly take stock of his TDSR position and determine which property to cash out sooner than later.  Doing so not only ensures maximum profit for owners, but more importantly, allow them to refinance their other mortgages in time to come when interest rises.