Monetary Authority Of Singapore broadens exemption from total debt servicing ratio for refinancing of owner-occupied residential properties purchased before the implementation of the Total Debt Servicing Ratio Rules.

Recap Of Total Debt Servicing Ratio Implemented on 28 June 2013

The Total Debt Servicing Ratio (TDSR) was introduced by the Monetary Authority of Singapore (MAS) on 28 June 2013 for all property loans granted by financial institutions to individuals.  These individuals include sole proprietorships, and vehicles set up by an individual solely to purchase property.

The financial institutions were required to take into consideration all borrowers’ other outstanding debt obligations when granting property loans to them.     The TDSR will apply to loans for the purchase of all types of property, loans secured on property, and the re-financing of all such loans.

At the same time, MAS had also refined the rules related to the application of the existing Loan-to-Value (LTV) limits on housing loan.

The above measures took effect from 29 June 2013.

Method Of Computing TDSR

It is a requirement by MAS that the financial institutions follow the method below for computing the TDSR:

• 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;
• apply a specified medium-term interest rate or the prevailing market interest rate, whichever is higher, to the property loan that the borrower is applying for when calculating the TDSR;
• apply a cut of at least 30% to all variable income (e.g. bonuses) and rental income; and
• apply cuts to and amortise the value of any eligible financial assets taken into consideration in assessing the borrower’s debt servicing ability, in order to convert them into “income streams” in computing the TDSR.

Subject to review, MAS expects any property loan extended by financial institutions to not exceed a TDSR threshold of 60%. Any property loans in excess of the TDSR threshold of 60% should be granted only on exceptional basis and subject to approval of the financial institution’s credit committee.

Refinement Of Rules Related To Application Of Loan-To-Value Limits

 MAS had also refined certain rules relating to the application of the existing LTV limits on housing loans granted by financial institutions as follows:

• borrowers named on the property loan to be mortgagors of the residential property for which the loan is taken,
• “guarantors” who are standing guarantees for borrowers otherwise assessed by the financial institutions 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; and
• In the case of joint borrowers, that financial institutions use the income-weighted average age of borrowers when applying the rules on loan tenure.

Exemption From TDSR For Refinancing Of Owner-Occupied Residential Properties Purchased Before 29 June 2013

In order to ease the debt servicing burden of certain borrowers, MAS had broadened the existing exemption from the TDSR threshold of 60% for refinancing loans for borrowers of owner-occupied properties which were bought before 29 June 2013.   The revised rules took effect from 10 February 2014:

Refinancing Loans For Owner-Occupied Residential Properties Bought Before 20 JUNE 2013

• Under the revised TDSR rules, a borrower who bought a residential property before the TDSR rules were introduced, i.e., the Option to Purchase (OTP) of the residential property was granted by the vendors to the borrower (also a purchaser) before 29 June 2013, will be exempted from the TDSR threshold as long as he occupies the residential property that is being refinanced. Financial institutions are expected to obtain documentary evidence that the Option to Purchase was granted before 29 June 2013 and the borrower occupies the property. This is a concession compared to the previous rules, which also require that he does not own any other property, or have any other outstanding property loan.
• The Mortgage Servicing Ratio (MSR) will also not apply to the refinancing of loans for HDB flats and Executive Condominiums that are owner-occupied and were purchased before their respective MSR implementation dates. This is provided that the Option to Purchase for the HDB flat was granted before 12 January 2013.  Whereas, for executive condominiums purchased directly from a property developer, the Option to Purchase was granted before 10 December 2013.
• Borrowers who purchased residential properties for owner-occupation before the respective implementation dates with loan tenure limits, which exceed the current regulatory limits (i.e., 30 years for HDB flats and 35 years for other residential properties), will be allowed to maintain the remaining tenures of their loans at the point of refinancing. This is provided that the Option to Purchase was granted before 28 August 2013 for HDB flats and 6 October 2012 for other residential properties.

 Refinancing Of Investment Property Loans

The TDSR threshold of 60% will continue to apply to the refinancing of all investment property loans.  However, MAS will allow a transition period until 30 June 2017, during which a borrower, may refinance his investment property loans above the 60% threshold, provided he meets the following conditions:

• the OTP of the property was granted before 29 June 2013;
• the borrower commits to a debt reduction plan with the financial institution at the point of refinancing; and
• the borrower fulfils the financial institutions’ credit assessment.