MAS Introduces Debt Servicing Framework for Property Loans to help strengthen credit underwriting practices by financial institutions (FIs) to individuals and encourage financial prudence among borrowers.

While it is good to exercise prudence in our investment, it is also harsh on buyers who are having savings in the bank but restricted to invest by the multiple sets of regulations round after round, each round tougher than the other. Let us take a moment to examine why is there a need to impose more regulations? Obviously, activities of transactions are overly healthy and a need to refrain buyers from being over committed on loans. However, looking at the regulations implemented over time, I started to realize that demand and supply are man made nowadays. That is one good reason why so many analysts couldn't predict the property market nowadays too. Many had expected market to collapse from 2009 to 2012, but up till date, it still remains healthy.

(1) The introduction of "Total Debt Servicing Ratio" (TDSR) framework.

MAS expects any property loan extended by the FI to not exceed a TDSR threshold of 60% and will regard any property loan in excess of a 60% TDSR to be imprudent. The threshold is set at 60% for a start to allow both the FIs and borrowers to familiarise themselves with the TDSR framework and its computation methodology. MAS will monitor and review the 60% threshold over time, with a view to further encouraging financial prudence.
This coverage of the TDSR framework will be more comprehensive than FIs? current practice. The TDSR will be applicable to all loans for the purchase of all types of property, loans secured on property (term loan), and the re-financing of all such loans. This also includes any credit card loans, credit line and car loans by individuals.

Example on how a buyer can be affected based on new ruling:

Mr Tan (33 years old) earns $8,000 per/month and currently financing a car loan of $200,000 over 10 years tenure. Each month's installment working out to be about $1,980.00. He potentially can take housing loan of about $960,000 which allows him to look at property worth around $1.2m (given 80% loan and 30 years loan tenure scenario).

After new TDSR was introduced:
60% TDSR: $4,800
Less car's installment: $4,800 - 1,980 = $2,820

Mr Tan can only take a property loan of $620,000 and look at property worth $775,000.

Based on current market, $1.2m can get decent 3 bedrooms condo in outside central region (OCR) market but $775,000 cannot even get a 2bedroom in the same area.

***Disclaimer: Calculations are based on approximate figure.

Good news, if Mr Tan have no other loan, he can actually loan about $1.05m and look at property worth $1.3m.

(2) Next, we look into application of a haircut of at least 30% to all variable income (e.g. bonuses) and rental income. This ruling mainly affects commission based salespeople and self-employed entrepreneurs. Imagine, salespeople who have their entire income based on commissions, or senior executives who have a high proportion of their income based on bonuses would be badly affected.

Example of an insurance agent earning $100,000 per annum can now only use $70,000 to make up the TDSR instead of $100,000. Wouldn't this affect his loan tremendously?

(3) To 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. Previous calculation were based on about 2.8% and may differ from various FIs.

(4) In the case of joint borrowers, that FIs use the income-weighted average age of borrowers when applying the rules on loan tenure. Hence, instead of using 30 years loan tenure for couple age 30 and 45 previously, they can only get 27 years loan tenure after the ruling if both earnings are equal. If father and son co-purchase, and dad has higher income than his son, it may result in an older average age and turn out to be shorter loan tenure for them.

(5) No more "guarantor" scheme. ?Guarantors? who are standing guarantee for borrowers otherwise assessed by the FI at the point of application for the housing loan not to meet the TDSR threshold for a property loan to be brought in as co-borrowers.

Example for this ruling, previously, after husband with income and wife (home-maker) sell off their property, they can buy a property each with 80% loan based on husband as guarantor to wife for her purchase. With this ruling, the wife cannot buy with 80% loan unless she has income that fits in the TDSR for her purchase. If husband wants to be guarantor to her purchase, he must be a borrower and 50% LTV applicable based on ruling that he has another existing loan.

With the latest 8th cooling measures introduced, it aims to deter buyers who are highly leveraged with property or non-property debts and also those who depends on low interest rate and betting that it won?t go up too soon.

Final example:

If you take a million dollars loan at 1.5% interest rate for 30 years loan tenure, your installment is about $3,451.00

By increasing the interest rate to 4.5%, your installment immediately increase to $5,066.00

If interest rate increase, are you able to finance the difference of $1,615.00? This is why the authority needs to step in with the measures to ensure stability in property market and borrowers' TDSR to remain prudence.

Knowing that the authority is doing a great job to ensure property market stable and safe, where would you put your money then? If market is really no good (heading south), is there a need to introduce any measures at all?

You decide for yourself!