The latest financial measure to hit the Singapore property market comes from Monetary Authority of Singapore (MAS), the same body that targeted car loans just a few months ago. This time, they are targeting housing loans with a range of refinements and definitions to level the playing field for both banks and buyers.

The refinements to the application of LTV limits will prevent people from using family members to make property purchases and to apply for loans on their behalf, as pointed out by several other news sources. This loophole allowed individuals to effectively have two housing loans, or more, without incurring Additional Buyers Stamp Duty.

Monetary Authority of Singapore (MAS)

But something else in that announcement caught our eye as well, within latest slew of measures described as a “TDSR framework”. It seeks to better outline the requirements and methods to compute and evaluate TDSR for property loans, and in doing so introduces a new 3.5% interest rate provision. We believe this number could drastically affect the house-buying plans of many. But first, some background on TDSR.

Just what is TDSR, or total debt servicing ratio? It is the ratio of the monthly loan repayment to monthly income. So in a simple scenario, if a person has a monthly income $2000, and he must make monthly installments of $1000 to repay his loan, then his TDSR is 50%. If he had to repay $1500 a month, then his TDSR would be 75%. This concept has been around quite a while, of course. What has changed is that MAS has laid out a way to compute TDSR consistently across all financial institutions.

Calculations must take into account the monthly repayment for the property loan that the borrower is applying for plus the monthly repayments on all other outstanding property and non-property debt obligations of the borrower. When making the calculations, there is a new requirement to use an interest rate of 3.5% (4.5% for non-residential properties), or the prevailing market interest rate, whichever is higher, must be applied to the property loan in question.

Any TDSR above 60% is considered by MAS to be imprudent, and as a rule, should not be granted.

So what does this mean for many of you out there, looking to buy a new home or first property? Well, before these new measures, your loan profile would probably look like this on a fictitious SGD1 million property:

Borrowable sum (80%): $800,000

Average market interest rate: 1.25%

Loan tenure: 30 years

Monthly repayment: $2666

At a TDSR of 60%, the borrower(s) would need to have a minimum monthly income of $4443 (after other loan and debt repayments are factored out) to qualify.

With these new measures in place since 29 June 2013, your loan profile will look quite different:

Borrowable sum (80%): $800,000

Mandated interest rate: 3.5% (at least)

Loan tenure: 30 years

Monthly repayment: $3592

A TDSR of 60% would thus require a minimum monthly income of $5987. That is of course after factoring out car loans, student loans and other debt repayments.

We believe this will dampen buying enthusiasm further, especially among those that can just barely afford repayments on a potential property. By preventing buyers in this group from proceeding with such a loan and placing themselves in such an over-leveraged situation, these measures will possibly

achieve what they set out to do – protect the banks and buyers against a market correction.

We hope we’ve managed to spell out things in greater detail, and helped to clarify these new rulings by MAS. Do you have any other questions, opinions or feedback? Please let us know by commenting below, or on our FacebookTwitter, and Google+ pages.

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  2 Responses to “MAS Has Another Go at Property Cooling Measures”

  1.  

    How will this rule work if me and my wife jointly purchase a property?

    •  

      Hi Mr Yeo,

      Thank you for your question. In a joint loan situation, the usual factors to determine total debt servicing ratio such as outstanding loans, and haircuts to variable income and rental income, will be applied to all joint borrowers. An income-weighted average age of borrowers will be used for loan tenure. This is all par for the course, even before the new measures.

      The biggest difference in your scenario is that the interest rate used to calculate how large a loan you can take has increased to a minimum of 3.5%, which means that with the same TDSR threshold of 60%, the borrowable amount has decreased. In other words, with the same income and TDSR parameters, you and your wife must now settle for a smaller loan than before.

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