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Main Points Of Property Loan Curbs On June 2013 And How It Affects You
You might have already heard about the new set of rules to govern home loan but not too sure about the details and how you are affected. This article hopes to bring some clarity to you.
What are the main points of the new property loan curbs?
- Guidelines for Total Debt Servicing Ratio (TDSR)
- Loan tenor to be determined by income-weighted average age
- 30% discount on variable income
- Borrowers to be mortgagors
- Minimum interest rate to use as stress test
Guidelines for Total Debt Servicing Ratio (TDSR)
The debt servicing ratio is not something new. All lenders will have their own way of calculating DSR and use that to assess a loan. A set of standardized guidelines serve to prevent lenders from being too lenient when granting home loans. If for example, DSR is at 60% when your income is $8,000/month, this means that a maximum of $4,800 is what you can afford to service the mortgage. On top of that your other financial obligations like car loans, education loans and personal loans, etc, have to be deducted from the $4,800. So if your total financial obligations add up to $2,500, what you can now afford to pay your home loan will now be $4,800 – $$2,500 = $2,300. Then if we take a loan tenor of 25 years at 3.5% interest, you will now be able to afford a loan of about $500,000.
Property loans will now be evaluated based on a ceiling of 60% TDSR. This does not mean that your home loan will be rejected by the bank once you exceed the TDSR. When you exceeds it, it simply means that you will only be able to obtain a loan up to 60% TDSR. The rules of TDSR will apply to refinancing as well.
How you are affected?
You are exactly the profile of borrowers that MAS has identified if you have a lot of credit liabilities. So if you already have plans to buy a new property within the next 1 year, you might want to take action on fully clearing your debt obligations before you buy an expensive condominium that you are unsure whether you can afford it. The key number to account for is your monthly installments. There is no public information on the details around this rule. There is a possibility that borrowers might be able to waive these obligations if your loan ends within 3 or 6 months of the application date. So give your lender a gentle reminder if your loan expires very soon so that they can take that into account.
Loan tenor to be determined by Income-Weighted Average Age
Previously, simple ways are used to calculate the loan tenor you are eligible for. Banks either take the youngest age, oldest age, or average age of borrowers when determining loan tenor eligibility. Tenor plays a critical part of loans as the longer the tenor the more affordable your monthly repayments are in real dollars.
With the new rules on loan tenor, the loan tenor you are eligible for will be based on the income of all borrowers. Again the specific details are not available at this time. But an income weighted average age may work this way. You have an income of $6,000 and age 40. Your spouse have an income of $4,000 age 30. Average age = [(6/10) x 40] + [(4/10) x 30] = 36. So the age to use for loan assessment will be 36 years young. The loan tenor will then have to take into account previous loan-to-value rules to finally land on a number. It’s a good thing I don’t work in a bank these days.
However, because the new set of rulings are to bring more prudence into loan approvals, lenders who are already using the oldest borrower’s age as a mean to calculate loans might be allowed to continue using their stringent criteria.
How you are affected?
This will affect you if you are borrowing as joint applicants. Previously, borrows might rope in a young adult as a borrower solely for their age in an effort to obtain a longer tenor. It will not be as simple now as the income of the young applicant will be taken into account. You are not affected if you are buying solely under yourself.
30% discount on variable income
Variable income are sources of income that are not your fixed salary. The most common type of variable income are commissions and bonuses. You might have a monthly salary of $6,000 but your annual income is $100,000. This after adding up your fat $28,000 bonus. Previously banks are allowed to take in bonuses as a salary.Now, a 30% discount has to be applied to your bonus before adding to your personal income. This means instead of $28,000, you bonus for loan calculation will now be $19,600.
How you are affected?
My hunch is that almost every investor will be affected by this. And it is a rule that will gravely affect how much we can loan. Employees on the higher end of the pay scale often draw miniscule salaries when compared to their bonuses. You might think that the average office manager draws an average salary. But if you add up their bonuses, a lot of times their annual incomes goes way above the per capita GDP.
Sales personnel will the directly be hit. If we take the rulings at face value, word-by-word, it means that professionals like insurance agents and property agents will not have a base salary to withstand the 30% discount. This is not really fair to these professionals. We shall see as more details regarding this ruling comes out.
Borrowers to be Mortgagors
In an effort to be eligible for as high a loan quantum as possible to finance property purchases, buyers have come up with creative ways to get around measures meant to limit loan to value eligibility. These can be in form of using borrowers to take up loans when they are not the property owners, or using only one party as borrower when in fact there are 2 owners. These cat and mouse games have been put to an abrupt stop by MAS. Now all borrowers have to be mortgagers and guarantors are to be joint-borrowers. On the surface, there don’t seem to be a way around it this time.
How are you affected?
Minimum interest rate to use as stress test
When calculating your loan quantum approval, lenders use an interest rate to determine how much monthly installment to use as a stress test on your income. In view that current interest rates are radically low, banks are already prudent in using much higher interest rates to stress test your affordability. With the new guidelines, this interest rate will now be 3.5%. I don’t think MAS will mind if a lender wants to use something higher. For your information, current market rates are just slightly over 1%.
How are you affected?
This is an act that really has your best interest at heart. Nobody including the authorities can predict exactly where interest rates will head, the speed it will rise, or the level it will linger at. You might find your monthly home loan commitments easily manageable now. But when mortgage rates eventually rise, you could be going into depression faster than you can call the bank.
This time, with these measures, even first time home buyers are affected. So if the bubble in mass market homes are indeed inflated by first time home buyers, maybe we are really going to see some downward movement on prices in this segment.