By Eugene Huang (guest contributor)
Are you still sitting on the fence waiting for property prices to drop before buying your next property? It’s not wrong to be prudent over such a major financial decision. However, while you’re waiting for property prices to drop, your chance of getting approved for a property loan may also be falling thanks to the TDSR (Total Debt Servicing Ratio).
In 2013, the Monetary Authority of Singapore (MAS) put in place a framework for processing and granting property loans in a way that strengthened and standardized the credit underwriting process used by financial institutions, while ensuring that borrowers would only take a loan that was within their capacity to repay. Thus, the Total Debt Servicing Ratio or TDSR was born.
The TDSR is the percentage of your income that can go into financing your new property, after including all your existing debts such as car loans, renovation loans, credit card loans, student loans, personal loans and other unsecured loans.
The TDSR capped the percentage of income allowed for debt servicing to 60%. If your loan repayment exceeds this limit, then you will not be allowed to take the mortgage.
For instance, you make $5,000 every month. Your TDSR is $5,000 X 60% = $3,000. This means that if you need to pay $800 a month for your car loan, $900 for a home renovation loan and $300 for credit cards, then you would only be left with $1,000 to service your mortgage. If your monthly loan repayment is at $1,200, you will be denied the mortgage.
So if you didn’t have other loans, would you have a better chance of getting approved for a property loan? Not really.
Enter The Stress Test
Because mortgages are long-term loans, the interest rates for property loans are subject to interest rate spikes. Financial institutions use a stress test to determine if you can handle future interest spikes and still manage to safely allocate a percentage of your income to debt servicing.
With TDSR, financial institutions standardized the stress test interest rate at 3.5% for home loans and 4.5% for commercial property loans. This means that property investors must maintain a TDSR of 60% assuming interest rates spike to 3.5% to 4.5%.
No More Age Roping
TDSR also considers the income-weighted average age to consider the loan tenure. This means that only income-earning individuals will be considered in the calculation of income weighted average age. Suppose you are 60 and you make $10,000 a month. If your wife is 43 but not working, then the loan repayment tenure will only be calculated against your age. In this case, you can obviously expect a shorter loan tenure (perhaps five years) because the financial institution will consider the years you will stay employed and generate income. With a shorter loan tenure, your loan repayment amount will be bigger.
Before, families would rope in younger income-earning family members into the income-weighted average age to increase the eligibility for loans at a longer loan tenure. With TDSR, this old tactic will no longer work.
Variable And Fixed Income Considered
TDSR also lowers the approved amount for those with variable income, discounting the variable income to just 70% of the actual income. For instance, your variable income is $4,000; financial institutions will only consider $2,800 as your actual income and calculate your eligibility for a loan based on this.
What’s Happeningin the Property Market Should Make You Wary
As you wait on the sidelines for property prices to drop, you’re also putting a lid on your chance to take a loan on account of these cooling measures.
Market watchers foresee a moderate price drop for the private residential properties this year amidst a mounting supply of new homes and with the government encouraging less exuberance in borrowings. For property investors, market watchers advise to expect a weak leasing activity and the pain of an impending rise in interest rates.
Positioning yourself for a larger loan
To be able to borrow from financial institutions later, you have to position yourself for a mortgage now.
You can do this by cutting down on other borrowings to increase your eligibility for a property loan. If you have variable income such as rent, fees and commissions, make sure to collect receipts. If you start positioning yourself today, you can have a higher property loan eligibility and hence make a larger investment when the time is right.
By guest contributor Eugene Huang, who is a co-founder of Redbrick, an established mortgage advisory that assists investors and homeowners in sourcing for the best financing option catered for their needs. They partner with major local and international financial institutions and deal with the banks on the consumers’ behalf. Having come from the local banking industry, Eugene Huang possesses over a decade of proven track record in providing financing solutions for real estate owners. In addition, the team at Redbrick has handled over 2,000 properties and over SGD$2 billion in mortgages. More than just a local mortgage advisory, they also structure and source for both commercial and residential mortgages in Asia-pacific including Singapore, Malaysia, Thailand, Australia, as well as Japan, USA and the UK.