In a surprise move to control property prices and regulating financial lending responsibility, the Monetary Authority of Singapore (MAS) introduced the Total Debt Servicing Ratio (TDSR) framework for all property loans granted by financial institutions (FIs), with effect from 29 June 2013.
TDSR affects both residential or non-residential properties, owned by individuals or companies, new applications or re-financed loans, and in or outside Singapore. Declaration and calculation of incomes and loans are also now very detailed.
This policy is seen as a “reactive intervention” approach – acting as general guidelines to the market and wait for “creative” thinkers to find loopholes, before creating more stringent rules to close the gap.
What are the major rules?
1) 60% threshold
Total debt obligations cannot exceed 60% of total income.
2) 30% haircut
There is an arbitrary 30% cut of all variable and rental income, and 30% to 70% cut for the value of eligible financial assets.
3) 3.5% or 4.5% interest rate
Calculate new loan repayments based on medium-term interest rate of 3.5% for residential properties and 4.5% for non-residential properties, or prevailing interest rate, whichever is higher.
4) Income-weighted average age
If a borrower can’t meet the TSDR threshold, the guarantor will be the co-borrower.
Use income-weighted average age of borrowers rather than younger borrower’s age to determine loan tenure.
Example of TDSR computation:
Which parties will be adversely affected by TDSR?
1) Marginal Buyers
Buyers who are highly leveraged with property or non-property debts, and buyers whose affordability depends on low interest rates and betting that it won’t go up too fast too soon
2) Multiple Property Buyers
Buyers who are buying their second, third or more properties with high outstanding loans, and buyers who bought properties recently at a high price, with low rental returns.
Note: Once interest rates go up, owners of multiple properties may not be able to refinance or repackage to lower monthly repayment even for the loan of their own residence if they exceed the TDSR threshold.
3) Two generation buyers
Buyers hoping to benefit from a longer loan tenure by putting the loan under a younger joint applicant’s name, and multiple property buyers hoping to benefit from higher LTV with a joint applicant buying for the first time