Working around TDSR (Total Debt Servicing Ratio)
TDSR refers to Total Debt Servicing Ratio. The Monetary Authority of Singapore (MAS) implemented the TDSR framework for property loans on 28 June 2013 in order to reduce risk of buyers over-gearing. Under this framework, all financial institutions will have to take into considerations the total debt repayment liabilities of the mortgagor. After the implementation, factors affecting the borrowers when they are applying for housing loans are:
- Employment status
- Existing liabilities eg. credit card min. payment, car loan, housing loan, renovation loan, etc
INCOME WEIGHTED AVERAGE AGE (IWAA)
In the past, loan tenures limits are based on the age of youngest borrower. Therefore, rich parents can insert their children’s name to increase loan tenures. Now, the new computation of loan tenure limit does not necessarily favour inserting a younger borrower. The average age will skew towards the borrower with higher income. The greater the income difference, the more it skew. So if the younger borrower has a low income, it doesn’t really gain more years in loan tenure. Below shows the formulae on getting the Income Weighted Average Age (rounded up to the nearest year).
After knowing your IWAA which allows you to find out the tenure limit that you can repay your loan, then you are ready to work out your monthly instalments. There are various smartphone or tablet apps that can help you work out the monthly repayment amount but, under the TDSR framework, you will have to adopt interest rate of 3.5% for residential property and 4.5% for non-residential property despite current interest rate is much lower. You will still have to abide the loan restrictions from the earlier cooling measures.
Current TDSR is set at 60% of income. What happens if the borrower exceeds the existing TDSR limit? Then we will have to hear about these 2 terms; Pledged & Unpledged. Any shortfall in the required income to keep within TDSR limits can be made up by other forms of assets like fixed deposits in the bank, stocks & bonds. There are almost no ways to circumvene the restrictions posed by TDSR regulations.
PLEDGED – JUST A LOWER GEARING
‘Pledge’ is the method of making up income shortfall by way of fixed deposit. If a borrower requires an income of $10,000 per month to keep the liabilities within 60% limits but currently only earns $8,000 per month, the $2,000 shortfall can be made up by this method. What is required of the borrower will be to deposit a sum of $2,000 x 48 months = $96,000 into the bank as fixed deposit for 4 years. Many buyers are put off by the need to utilise even more cash on top of the commonly encountered Additional Buyers’ Stamp Duty. It just means a lower gearing for now. The only way to lessen the impact would be to do refinancing to reduce the fixed deposit amount. This is provided the income has significant increase and liabilities are significantly reduced.
UNPLEDGE – BUYING TOGETHER WITH FRIENDS
‘Unpledge’ is another method of making up income shortfall by way of deposit, but the difference is in the amount and also the timeline. Pledge method requires 4 years worth of income difference to be fixed deposited for 4 years. Unpledge method on the other hand only requires borrower to show his assets at the point of application and 1st disbursement of loan. However, the difference would be more than 3 times. Assuming the borrower previously mentioned chose to use unpledge method, the amount of asset he has to show has to be worth $96,000 / 30% = $320,000. For more BUC development, this method doesn’t seems to be favourable. However, there are some circumstances which might make this method less restrictive:
- A group of friends doing bulk purchase; they only require 1 unpledge amount to get loan for everyone
- The balance downpayment and first disbursement are due at the same time
- Individuals with very high overdraft limits
EXEMPTION FROM TDSR
Owner-occupied properties bought before 28 June 2013 (based on option date), are not subjected to TDSR restrictions. This revision to the TDSR regulation comes after the implementation date so that the earlier buyers can still refinance to enjoy lower interest rates. This is regardless of the number of properties owned by you. As long as the loan that you refinance is for the property bought before 28 June 2013 and that you are actually living there, you are exempted from TDSR limits.
In fact, we ought to be glad for TDSR. The basic principle of economics will be:
- High interest rates -> Bank wants you to deposit money -> Reduced buying power -> Deflation
- Low interest rates -> Bank wants you to take loan -> Increase buying power -> Inflation
So if TDSR wasn’t implemented, property prices would have continue to inflate the long term impact would be even more painful. Financial prudences is always good. Buying a present soft market gives buyer more bargaining power and get a good price. Just avoid getting greedy and ask for impossible prices of yesteryears would be more important, because it is impossible to turn back time.
From 11 March 2017 onwards, equity withdrawal loans (term loan), will not be subjected to TDSR framework as long as Loan To Value (LTV) does not exceed 50% of property value.