Property loan pegged to total debt profile
To promote financial prudence banks must ensure that loans stay within 60% of total debt servicing ratio
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To promote financial prudence banks must ensure that loans stay within 60% of total debt servicing ratio
Kelly Tay
29 June 2013
Starting today, individuals who buy property will have their entire debt profile taken into account when they apply for a property loan.
Under the government’s new total debt servicing ratio (TDSR) framework, financial institutions must consider all of a borrower’s outstanding debt obligations. This means that in addition to property-related loans, other debt repayments pertaining to cars, renovations and credit card loans will be factored into a borrower’s debt profile.
The Monetary Authority of Singapore said that it expects all property loans to stay within a TDSR threshold of 60 per cent - computed as a percentage of total monthly debt obligations to gross monthly income.
To prevent borrowers from overextending in their property purchases - especially given prevailing expectations of low interest rates - a specified medium-term interest rate, or the prevailing market interest rate will be applied, whichever is higher.
For residential property loans, the rate is fixed at 3.5 per cent; for non-residential property loans, it is 4.5 per cent.
Only 70 per cent of a borrower’s variable income - such as money from rentals and bonuses - can be considered part of one’s monthly income. The value of other financial assets will be amortised, and added at a discount.
According to an MAS announcement yesterday, the new rules are not aimed at directly cooling property prices, but are instead “structural in nature and meant for the long term”. The measures were shaped in part by findings from MAS’s inspection of banks last year, when it found that banks had varying methodologies in applying debt servicing ratios.
With the fresh framework, MAS hopes to strengthen these institutions’ credit underwriting practices, and encourage financial prudence among borrowers.
Kelvin Tay, UBS Wealth Management’s regional chief investment officer for the Southern Asia-Pacific, told BT that the new rules come as no surprise.
“Ultimately, you want to prevent a property bubble from blowing up. Household debt as a percentage of annual GDP rose sharply from 46 per cent in 2004 to 68 per cent at the end of last year,” said Mr Tay.
“This figure would have reached an estimated 72 per cent by the end of this year. (The new measures) restrict how much you can now borrow, and that’s a prudent step in the right direction.”
Even though the 60 per cent TDSR threshold may seem harsh to some, Bank of America Merrill Lynch Asean economist Chua Hak Bin said that it’s a “reasonable requirement”.
“Anything exceeding 60 per cent would probably be excessive. The government wants to guard against people overstretching themselves, thinking that interest rates will stay low forever,” explained Dr Chua.
Nicholas Mak, head of research and consultancy at SLP International, noted that even though the new measures may not reduce property prices immediately, they could bring private residential prices down by early next year.
Other industry watchers warn that developers must now reconsider their pricing and marketing strategies when launching upcoming projects.