Yahoo Finance MAS’ Latest Rules for Property Loans and How It Affects You
The Monetary Authority of Singapore (MAS) has just announced a new framework for all property loans granted by financial institutions to individuals. These new restrictions come into immediate effect on 29th June 2013 and now make it that much harder to qualify for a home loan in Singapore. Since it is still too early for an in-depth analysis, we are speculating on the effects in this article:
This is the government’s latest attempt to promote sustainable conditions in one of the most eventful property cycles in decades.
What Exactly are the New Measures?
MAS states that the primary purpose of the new measures is not to “cool” the red hot property market but rather, to standardize and strengthen the credit underwriting processes used by financial institutions while encouraging financial prudence among borrowers. The restrictions are as follows:
Standardization of Total Debt Servicing Ratio (TDSR)
Using Income-Weighted Average Age to Determine Loan Tenure
Haircut of 30% for all variable income
Borrowers to be Mortgagors / Guarantors to be Joint-Borrowers
Raising the interest rate benchmark for stress testing
Greater stringency in the application process
1. Standardization of Total Debt Servicing Ratio (TDSR)
The Total Debt Servicing Ratio (TDSR) is the percentage of your income that can go toward servicing your home loan, after taking into consideration your other debts. Other debts include: car loans, renovation loans, study loans, credit card loans and other secured or unsecured loans.
*Note: Insurance / investment policy premiums are not considered debts and do not need to be factored in.
Previously, financial institutions used 50% as the percentage guide for calculating how much of your income can be used for servicing all your debts (known simply then as DSR – Debt Servicing Ratio). Now, the Total Debt Servicing Ratio is capped at 60% for all financial institutions. If your loan repayment would exceed this limit, you cannot take the loan.
For example, let’s say you earn $4,000 a month.
This means the maximum possible “buffer” for all your loans is (60% x $4,000) = $2,400.
Say you pay $600 a month for your car loan, and $700 a month on your renovation loan. The total amount of your income you can use to service your new home loan is ($2,400 – $600 – $700) = $1,100.
*Note: If your home loan repayment would exceed this amount, you must lower the loan quantum (the amount you are borrowing), until it falls within this limit.
The language used by MAS (they said TDSR is 60% for now) suggests they might lower it further, in time. Also, note that the TDSR applies to refinancing of such loans as well.
With 60% TDSR, it has become even more important to avoid other debts when you plan to buy property.
How does this affect you?
The use of TDSR will only affect you if you have borrowed heavily for other reasons. While raising the cap from 50% to 60% seems like a good thing at the onset, a 60% threshold under the prescribed TDSR framework would, in reality, be tighter than a 50% threshold applied under less stringent definitions with less coverage.
So if you are looking to buy private property in the near future, you will had best avoid borrowing for other major purchases until then.
The TDSR is also an important concern if you see refinancing as a crucial step to managing your mortgage. Looking at home loan packages with lower interest rates beyond just the first 3 years is now necessary for a good long-term strategy. You can compare such interest rates across all banks at free-to-use mortgage comparison websites like SmartLoans.sg.
*Note: Refinancing under the new TDSR does NOT apply to existing borrowers who meet specific conditions set out in MAS’ Guidelines on the Application of TDSR for Property Loans under MAS Notices 645, 1115, 831 and 128.
2. Using Income-Weighted Average Age to Determine Loan Tenure
In a previous round of cooling measures, restrictions were applied based on the age of the borrower.
If the loan tenure would last beyond the borrower’s 65th year, the Loan-to-Value ratio (the percentage of the property price the bank can lend) would be reduced. In the case of joint applicants however, this would be based on the average age of all the applicants or sometimes even the age of the youngest applicant. Whether the applicant is an income-earner or how much income he or she was earning was never standardized or set in stone.
The new restriction ensures that only income earning applicants factor into the calculations and an “income-weighted” average of the ages will be applied. For example:
Say you work, but your wife doesn’t. You are 40 years old, whereas your wife is 34. Even if the two of you jointly purchase the property, only your age would count, not the average age of you and your wife. This is because your wife is not an income earner. If your wife earns significantly less then you, the determined age would lean towards your age of 40.
Is your wife or husband working? Non-income earners no longer factor into the averaged age of buyers.
How does this affect you?
This only affects joint applicants, for whom the age restriction is a concern. Common “tactics” are now not possible too. In the past, older applicants (e.g. 50 years old) earning significant more (e.g. $10,000 per month) could get a higher loan tenure by roping in their younger children (e.g. 21 years old) earning significantly less (e.g. $2,000) to lower the starting age from 50 down to 35 (average of 50 and 21) or sometimes even 21 (youngest borrower). This will not be the case anymore.
*Note: At the point of publishing, it is still unclear exactly what formula will be used to determine the age. We will update this portion as we have more information.
3. Haircut of 30% for All Variable Income
Variable income refers to sources of income besides monthly “fixed” pay. Typical examples include:
Commissions from sales
Rental income from your properties
Monthly bonus
Income from side-projects or freelance work
A borrower’s variable income is treated as being 30% less than it actually is. So even if you get a year end bonus of $4,000, the bank will treat it as if your bonus was only ($4,000 – 30%) = $2,800.
This matters when calculating your TDSR (see point 1).
How does this affect you?
If you are self-employed or have a significant portion of your total income coming from other sources, you will find it much harder to get a loan. This is because most of you income is now considered to be “variable”.
People who work on commission (e.g. property salesmen, financial advisers and so forth) are all affected. People who get fat year-end bonuses are also affected.
New MAS measures drastically affect the self-employed, due to their variable income.
4. All Owners to be Borrowers / Guarantors to be Joint-Borrowers
MAS now required all owners of a property to be borrowers, and all guarantors to be joint-borrowers. Borrowers will be subject to the loan-to-value regulations. Essentially, the government is clamping down on home buyers who engage in proxy arrangements with other parties to intentionally dodge MAS restrictions that they would otherwise face.
For example, currently, someone with no outstanding home loan can borrow up to 80% of a property’s value. Someone with existing home loans can borrow a lot less (50% for the 2nd home loan and 40% for third and beyond).
As such, in the past, some home buyers would simply list another credit-worthy person (often the spouse or child) as a guarantor should the financial institutions require some “mortgage repayment surety” from them when buying a house. They would be considered a joint owner of the house. However, the guarantor did not technically have to be a borrower (hence not subject to a lower LTV % when he or she buyers the next property).
*Note: A guarantor is someone who promises to take on the home loan obligation, should the borrower default on it.
This meant you could have once borrowed up to 80% to buy a house, list your wife as a guarantor to secure the loan, and then have your wife loan up to 80% to buy another house (since she technically has no existing home loan tied to her name).
Bottom line is: A husband and wife team just got two 80% home loans when the government thinks that there should only have been one. In the scenario above, the wife will only be allowed up to 50% financing for the next house she buys.
How does this affect you?
The tactic we described above can no longer be used. Anyone who is an owner will be considered a borrower and this will affect the loan financing % for any future property purchase. Any guarantor will be treated equally as a borrower and his/her loan-to-value eligibility for any future property purchase will be affected accordingly.
*Note: A guarantor is not subject to the TDSR of 60%.
5. Raising the Interest Rate Benchmark for Stress Testing
Banks will now always assume the interest rate is 3.5%, when working out your home loan.
When calculating your TDSR / DSR, banks do not actually use the current interest rate. They assume an interest rate that is much higher, and this rate is referred to as the “stress test”.
For the past decade, the interest rate on home loans has been at a historical low (around 1%). However, financial institutions recognize that this is temporal and that interest rates will eventually rise. As such, in the past, banks often calculated your DSR as if the interest rate were higher (2.5% to 3%). They essentially want to see if you can still meet your mortgage repayment obligation should interest rates rise to this point.
Now, MAS has standardized and raised this stress test. All banks must calculate your TDSR as if the current interest rate is 3.5% (for residential property) and 4.5% (for commercial property).
How does this affect you?
Some buyers have been reckless about property purchases, due to the low interest rates. This measure is an attempt to rein them in. It will prevent a sudden spike in the loan defaulting rate, should the interest suddenly rise. Singapore does not need it’s own sub-prime mortgage crisis.
So if you find the new TDSR tough to meet, this stress test makes it that much more difficult. A higher stress test percentage means you require a higher monthly income to pass the test you once easily passed before.
6. Greater Stringency in the Application Process
What to expect for sure? More paperwork.
MAS requires banks to run more stringent checks, during the loan application process. This is to catch “fudged” numbers, or loan factors that slip through the cracks.
Before these measures, for example, car loans were loosely monitored. If your car loan was $600 per month, you could probably have gotten away with claiming “Oh, it is around $560 a month” .
Likewise, some people would apply for personal loans at around the same time they applied for home loans. They would hope that, because their personal loan was so recent, it would not appear on the background check when applying for the home loan.
How does this affect you?
The above tactics can no longer be used. Even if you would never have attempted those, there will be greater inconvenience in filing your home loan paperwork. Expect financial institutions to suddenly demand greater documentation proof for a wider category of issues.
Ok. After all that, can you still afford a house?
Just like the recent round of cooling measures imposed by the MAS, first time buyers are still the least affected, which may be good news if you’re in the market to buy your first home. If you are a speculator of property, now might be a good time to rethink your finances and perhaps start exercising what the government is trying to promote – financial prudence.
Either way, before you pay that option fee though, make sure you check how much you can borrow, it may be much lower than you think. Mortgage Advisory Firms like SmartLoans.sg offer to help you get In-Principal Approvals (IPA) from banks which help you determine and secure the loan before your purchase the property. You can also compare the latest home loan rates form banks and their highly qualified Mortgage Specialists will help you with the paperwork to make things as easy and convenient for you.
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