Monday, 23 September 2013

Language - Total Debt Servicing Ratio


The Monetary Authority of Singapore (MAS) has introduced “Total Debt Servicing Ratio” (TDSR) framework for all property loans granted by financial institutions (FIs) to individuals on 28 June 2013.  This will require the FIs to take into consideration borrowers’ other outstanding debt obligations when granting property loans and will help strengthen credit underwriting practices by FIs and encourage financial prudence among borrowers.

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.

The methodology for computing the TDSR will be standardised.  FIs will be required to:

-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 (3.5% for housing loans and 4.5% for non-residential property loans) 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 haircut of at least 30% to all variable income (e.g. bonuses) and rental income; and

- MAS will require borrowers named on a property loan to be the mortgagors of the residential property for which the loan is taken;“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; and in the case of joint borrowers, that FIs use the income-weighted average age of borrowers when applying the rules on loan tenure.

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. MAS will monitor and review the 60% threshold over time, with a view to further encouraging financial prudence.    
  
The new rules will take effect from 29 June 2013.

Let looks at the following case:

Looking to buy a condo for the first time.

Interest Rate
1st Year
3M SIBOR +
0.95%
Purchase Price:
$1,000,000
2nd Year
3M SIBOR +
0.95%
80% Loan Amount:
$800,000
3rd Year
3M SIBOR +
0.95%
Loan Period/Yr:
30
4th Year
3M SIBOR +
0.95%
SIBOR:
0.38%


Repayment Details


Principal + Interest Per month
Year
Interest Rate
Description
Principal
Interest
Total
1st Year :
1.330%
$P1 + $I1
$1,810
$886
$2,696
2nd Year:
1.330%
$P2 + $I2
$1,810
$886
$2,696
3rd Year:
1.230%
$P3 + $I3
$1,838
$820
$2,658
4th Year Onward:
1.230%
$P4 + $I4
$1,838
$820
$2,658

Let’s say the buyer commitment is $2658 per month upon the 4th year of the loan disbursement. If we were to assume that this purchaser has a car loan and credit card of $1,400 per month and an income of $10,000 per month. The TDSR is 41%.

If the property industry become even more challenged with an interest rate hike, then the possibility of a property default increases.

If interest Increases by :
1%
2%
3%
4%
5%
Interest Rate on Year 5:
2.230%
3.230%
4.230%
5.230%
6.230%
Monthly Installment
$3049
$3472
$3926
$4407
$4915
Other Total Liabilities
1400
1400
1400
1400
1400
Total Recognized income
10000
10000
10000
10000
10000
Debt Serving Ratio(DSR)
45%
49%
54%
59%
N/A

It is not impossible for an interest rate environment of five percent to return, but do not wait for it to happen. Learn to plan for this and start looking at controlling your liabilities. For instances, reduces your card loan or spent lesser from credit card.