SINGAPOREANS think property is the be-all and end-all of investing, because that’s what happens when you cram over five million people on a tiny island; You really start to put a premium on personal space. So now we have to keep home prices under control with a Total Debt Servicing Ratio (TDSR), which caps how much home buyers could borrow. That’s healthy for the economy as a whole, and bad news for anyone stuck with an expensive loan package. The Business Times recently reported that it’s a problem for those looking to refinance, and here’s why:


Understanding the TDSR

The TDSR is a property cooling measure introduced on June 28, 2013. It restricts the maximum amount you can borrow in order to buy a house, because you know how we Asians are when it comes to property – we have the self-control of a heroin addict who just found the CNB evidence locker. There are four main parts to TDSR:

  1. The 60 per cent threshold
  2. Haircut on variable income
  3. Income weighted average age
  4. Guarantors must be joint borrowers


1. The 60 per cent threshold

The TDSR imposes a threshold of 60 per cent. This means your monthly mortgage repayments plus your other debt obligations (e.g. credit cards, car loans, personal loans, and so on) cannot exceed 60 per cent of your monthly income.

For example, if you earn $6,000 per month, your mortgage repayments plus outstanding debts cannot exceed $3,600 a month. If you would exceed this amount, you need to borrow less money for your house and be physically restrained from credit cards.


2. Haircut on variable income

The TDSR imposes a further 30 per cent haircut if the income source is variable. For example, say you’re a salesman working on commissions, and you earn $9,000 a month on average. With the TDSR, it counts as if you only make $6,300 a month. With the 60 per cent threshold, that means your monthly loan repayments cannot exceed $3,780 per month.


3. Income weighted average age

In addition to the cap, the TDSR uses an “income weighted average age” to determine earning capacity. Prior to this, the only concern about age was whether the loan tenure would continue beyond the borrower’s 65th birthday. In the case of joint applicants, the average age of the joint applicants was used.

The TDSR imposed an added condition: only income earners can factor into the age equation. So if you are 35 years old and employed, while your wife is 28 years old and not working, it is your age that will be used, not an average of the two. This translates to shorter loan tenures, and hence higher monthly repayments.


4. Guarantors must be joint borrowers

Under the TDSR, guarantors for the property loan must also be joint borrowers. So unless your rich aunt actually wants to pay the mortgage and own part of your house, she can’t be a guarantor. This is a problem because, before the TDSR, many borrowers counted on the income of a guarantor to secure their loan.

Which leads us to the issue of refinancing.


What’s refinancing?

There are many ways to explain this, many of which are prized by the medical profession as a cure for insomnia. Skip this part if you have to drive or operate heavy machinery later.

That said, refinancing is the process of switching from one home loan package to another, by transferring your mortgage to another bank (note: if you switch loan packages but stay with the same bank, that’s not refinancing. That’s repricing.)

The reason people refinance is that the interest rates for property loans fluctuate.

In Singapore, banks only offer fixed interest rates for a certain period, often three to five years. After that, the interest rates become floating rates, which are pegged to either the Singapore Interbank Offered Rate (SIBOR) or the Swap Offer Rate (SOR).

So if the SIBOR rate is 0.82 per cent, and the bank’s spread is 0.9 per cent, you would have an interest rate of 1.72 per cent.

This further varies based on how often the rate is revised (one month, three months, six months, etc.) and whether exotic options like hybrid interest rates or interest offset packages are involved.

It gets complex, so let me simplify: home loan interest rates can go up. And they usually go upa lot on the fourth year.

When that happens, borrowers escape to a cheaper home loan package. That means refinancing.

Previously, refinancing was a norm. We changed banks more often than Italy changed sides in a war. With the TDSR in place however, things have gotten way more complicated.


TDSR imposes a slew of difficult conditions on people who refinance

When you refinance, the bank needs to go through the entire process of approving your loan all over again. This is where problems occur.

The Monetary Authority of Singapore (MAS) has exempted borrowers from the 60 per cent threshold if they obtained their loans before 29th June 2013. But there are still problems for some who want to refinance.

Such as, say, the 30 per cent hair cut on variable income.

Before the TDSR, a commissions based salesman who earned $9,000 a month got a loan based on that full income. After TDSR, he now counts as earning just $6,370 a month (see point 1). Suddenly, when he tries to refinance, he might find he does not qualify for a loan under the new 60 per cent threshold.

Likewise, those who previously qualified for a loan may now be disqualified, because they previously relied on guarantors (who can no longer help them without being borrowers).

Say you got your property loan approved with the help of a guarantor, or back when your full variable income was recognised.

You picked a loan package with a low-interest rate of 1.6 per cent per annum, which suddenly jumps to 2.2 per cent per annum for the fourth year.

There are other loan packages, ranging from 1.6 per cent to 1.9 per cent interest in the market. All of them cheaper. But you can’t refinance into any of them because under the new TDSR rules you can’t qualify for the same level of loan that you previously could.

This leaves you stuck with a higher interest rate, and nowhere to go.


What you can do about it

Scream at a convenient wall. There’s no real way around this until the TDSR is lifted, and everyone stuck in an expensive property loan can pay it or downsize.

Prevention is the way to go here. If you don’t have a property loan yet, start thinking long term. Watch how much your loan interest rate will be for the fourth year and beyond, and make sure you can handle it.

If you’re buying an HDB flat, you can escape some of these issues with an HDB concessionary loan instead of a bank loan. HDB loans are more expensive at the moment (2.6 per cent versus a typical 1.9 per cent for bank loans), but you won’t face sudden spikes – the rates are always 0.1 per cent above the prevailing CPF interest rate.

Original article here by Ryan Ong.