Effective 29 June 2013, MAS have introduced a Total Debt Servicing Ratio (TDSR) framework to ensure consistency in credit underwriting for property loans granted by financial institutions to individuals. The individual is inclusive of sole proprietorships and investment vehicles set up by an individual solely to purchase property.
The new framework will require all financial institutions to take into account borrowers’ other outstanding debt obligations when granting a mortgage. This framework is meant to strengthen financial prudence among borrowers.
The new framework will also refine rules to patch up “loopholes” relating to the application of existing Loan to Value (LTV) limits that were introduced on 12 Jan 2013 to limit the financing quantum that financial institutions may grant to borrowers. These refinements seek to ensure the effectiveness of the applicable LTV limits were enforced diligently to cool investment demand in the Singapore property market.
Under the new framework, financial institutions will be required to compute the TDSR or the percentage of total monthly debt obligations to gross monthly income on a consistent basis of not exceeding 60% in debt servicing ratio, applied with a medium term interest rate or the prevailing market interest rate, whichever is higher, to the property loan that the borrower is applying for when computing the TDSR. The standardise medium term interest rate under the new framework is set at 3.5% for residential housing loans and 4.5% for non–residential property loans.
Other measures include a standardise 30% haircut to all variable income (e.g bonus) and rental yield and applying haircuts to any eligible financial assets taken into consideration in assessing the borrower’s debt servicing ability when converting them into income streams for computing the debt servicing ratio (DSR).
Measures meant to patch up existing “loopholes” on applicable LTV limits include:
- Having all borrowers named on a property loan to be mortgagors of the residential property.
- Guarantors who are standing guarantee for home borrowers are to be brought in as co-borrowers instead.
- For joint borrowers, the financial institutions would use the income-weighted average age of borrowers when applying the rules on loan tenure. The income-weighted average age will be based on the borrowers’ gross monthly income. Lower LTV limits apply to a loan granted for the purchase of a residential property, where the loan period extends beyond the retirement age of 65 years or the tenure exceeds 30 years.
The overall introductions of the new framework are structural in nature for the long term. These are aimed at encouraging prudent financial borrowing by home owners and to standardise and strengthen credit underwriting standards used by all financial institutions. Analysts expect the new cooling measures to be subdued while developers and property agents have reported seeing similar crowds at showflat over the weekend today and yesterday. Personally, we see this more of a windows 7.1 patch than a new launch of Windows 8.
Appendix 1 - Second Quarter 1/7/2013 URA Private Residential Property Price Index
Appendix 2 - Second Quarter 1/7/2013 URA Non-Landed Private Residential Property Price Index
Appendix 3 - Second Quarter 1/7/2013 HDB Resale Price Index