“The Big Freeze is Coming”
Dear Friends of GEN,
I was chatting with a friend recently who has done very well in life and is what we would call an investor, more accurately a property investor.
He lamented to me that at the beginning of the year, his bank was willing to lend him up to $9 million to buy property but a few weeks back when he updated his status, the quantum had been reduced to only $1.5million.
“Like that how to buy? Aye financial planner…how ah? Any ideas?”
I did what every proactive financial planner will do; I called a banker and asked some questions.
“Hey, any new cooling measures?”
“Then when my friend tells me that his loan quantum has been drastically reduced, is that true?”
“Hmm…but there’s no new cooling measure right”?
“Right, there are no new cooling measures but there is a new freezing measure.”
Sometimes, we just have to take a step back and enjoy the ironies of life, the paradoxes and well…the measures. After seven rounds of so called “property cooling measures” that did not seem to have the desired effect, it took the introduction of a new “Debt Servicing Framework for Property Loans” introduced by the Monetary Authority of Singapore on 28 June 2013 to get the attention of the property market with sales of new private homes plunging by 73% in July. The funny thing is, no one is calling it the eighth round of cooling measure.
On closer inspection, it indeed does not qualify as a “cooling” measure as this measure is expected to be long term, unlikely to be changed often or quickly. Since it’s here to stay, it is important to know what it means to you and I hereby introduce another term for you to remember – TDSR on top of your SRS, DPS, TOP, OTP, OSC…etc.
TDSR stands for “Total Debt Servicing Ratio” and in this context, we are talking about the amount of debt servicing (layman term is monthly repayment) for all loans including car, renovation, credit card…etc. If you buy property without the need to borrow, this does not affect you. If you buy a HDB property and is borrowing from HDB, this does not affect you as you will be subject to what is known as Mortgage Servicing Ratio and that’s another story altogether. TDSR affects us when we have to purchase a property with the help of a loan from a financial institution (typically a bank).
TDSR is basically a formula used to calculate how much a financial institution can lend to potential customers looking to take a loan from them for the purpose of purchasing a property or a loan secured by the property (i.e. refinancing of loans for property with option to purchase granted after 29 June 13).
The TDSR is computed by dividing your monthly total debt obligations over your gross monthly income and multiply by 100%. For the mathematicians, it’s (Monthly total debt obligations/Gross monthly income) x 100%. If for example, you are currently paying $2,000 a monthly for your loans (i.e. car, renovation…etc) and your monthly income is $4,000, your TDSR is 50%. Financial institutions are allowed to borrow you up to 60% of your TDSR thus you can only take a loan that will require a monthly repayment of up to $400(i.e. 10% more).
“Aiyoh, so simple, I can cheat mah. Just borrow longer and the monthly repayment is lower right?”
“Wrong. There are implications such as Loan-To-Value ratios affecting loans where the repayment goes beyond age 65. Basically, if you take too long a loan, you cannot borrow too much”.
“Ok, I still got one more trick up my sleeve. I ask my niece who just started work to buy with me and so can take longer loan right?”
“Wrong. Housing loans rules have been refined to include the use of income weighted average age of joint borrowers. Basically, this means both the income and ages of the joint borrowers will be averaged so people who have this idea will let it remain an idea”
“Huh, never mind, I go find bank got ultra-low interest rate package one so the monthly repayment is lower right?”
“Wrong. The bank can offer you a low interest rate but for the purpose of calculating TDSR, the bank has to use an interest rate prescribed by the framework which is 3.5% for residential property loans and 4.5% for non-residential property loans”
“Wah! Like that really must use my own money to buy liao. Luckily I got rental income and since I do my own business, I declare more bonus lor.”
“Hmm…sorry, still not so easy. All these income are known as variable income and a 30% haircut will be applied to them”
“What! Simi haricut? I already losing hair, no need to any how cut hair.”
“Opps, the haircut is for the calculation of the variable income portion of your gross income. You can only count 70% of such income. For example, if your rental income is $10,000 a month, only $7,000 can be used as your gross monthly income calculation”
“OMG! My income also kena cut. Nevermind, I have to show hand. What about the $1million in deposits I have with the bank. They say I’m a private bank client and got many privilege leh.”
“Yes, that’s right. You can include your financial assets in the calculation of your gross monthly income. However, they will be subject to haircuts and amortization over 48 months to calculate the income stream.”
“Wah lau…there goes my Danga Bay dream!”
Jokes aside, there are many materials to read carefully before one can say that you truly can comprehend the TDSR framework so I want to make clear that I’m no expert in this topic. However, clients have been asking us about this and I’ve done some reading to make sense especially since TDSR will be here to stay. Hopefully, this illustration helps you to understand this new framework better.
You can refer to the links below to further your understanding and do point out any misunderstandings I may have.
Does all of this mean that I am extremely pessimistic about the property market in Singapore? The answer is of course not. On the contrary, I cannot be more positive and optimistic because this is exactly what I hope to see, that the environment is one where property buyers and sellers are making rational decisions and such a framework will make everyone think carefully and hopefully take positions that are longer term in nature. If there is a piece of real estate that you or I like, we are now able to value it with more certainty and work our sums accordingly as well. Isn’t that exactly what an investor wants?
For those who have the ambition to buy a property in the future whether it’s to have your dream home or to generate a rental income, I’m sure you are already looking around. If you really see something that tickles your imagination, let us know and we will ask our colleagues, the mortgage specialist from our partner banks, to help you with an “approval-in-principle”. That gives you an indication of how much you can borrow before you initiate the buying process. With TDSR, it’s not just a good practice, it’s a necessary practice.
Finally, here are some places you can refer to with regards to the information I used in this article
Until we meet, stay safe, healthy and happy!
Article by Lee Meng Choe
The writer is the Executive Director (Distribution) of GEN Financial Advisory