What happened when the TDSR is coupled with rising housing interest rates?

With the introduction of Total Debt Servicing Ratio (TDSR) framework by Monetary Authority of Singapore (MAS) mid last year, the local property market has cooled off significantly. Though it was not officially considered as the 8th government’s property cooling measure, it was probably the most effective measures till date on cooling the red hot local property market. Prior to the implementation of TDSR framework, though every bank already has a set of loan approving criteria, their practices may not be even across the industry. So there are group of borrowers who had previously taken the mortgage loan before the new framework was introduced, they may not have qualified for the same housing loan now with the current TDSR framework. As the current interest rates are still low, it did not warrant any concern for this group of borrowers, but with the impending rising interest rates in the foreseeable future, the same group of borrowers may be greatly affected if they are not able to restructure their loan to a better interest package when necessary.

The thing to avoid is when you are due for refinancing, or you want to lower your loan interest package, then you find out that you are not able to get the bank to refinance or re-price your mortgage. Let’s look at who may falls into the risky group:

1. Borrowers who relied on guarantor(s) for their existing loan. You may be stuck with this current arrangement as the borrower now will have to be the mortgagor of the property. Similarly, for those who have borrower who are non-mortgagor for their existing loan. But as of now, there are a couple of banks that may allow the refinancing of such loans with the same loan structure.
2. Borrowers who have previously relied on asset based methods or priority banking relationships to secure their loans.
3. Elderly parents who have helped or used their kids (especially those who just started working) to buy a private property.
4. Borrowers who bought a car with high instalment plan or taken many credit facilities.
5. Multiple Property Owners who may be hit by lower rental income, no tenant or rental tenancies which are expiring soon at the point of refinancing. A higher housing loan interests in the future imposed on your entire properties portfolio may also means your TDSR score may fall.
6. Loss of job or in between jobs at the point when refinancing is due. Notwithstanding retrenching, it may be worth taking note of the timing of the two events before any decision making.

A little note that borrowers who chose to opt for very short loan tenure may find the high instalment for this particular mortgage affecting his other property purchase.

The key point to note is even for refinancing and re-pricing, TDSR will be applicable as well. So it is timely for these risky groups to work out their financials early and to make necessary changes before they are caught in a situation where they cannot refinance or re-price to a better loan rates and have to pay high housing loan interest. The idea is to avoid pressing the panic button later on.

A stress test on your TDSR score may be good to determine if you fall in any of the mentioned risky group.

Though according to the MAS guidelines, there may be those who may be exempted from TDSR if they meet certain conditions (MAS’ Guidelines on the Application of TDSR for Property Loans under MAS Notices 645, 1115, 831 and 128). It is not to be taken for granted that the banks will approve their refinancing even if these conditions are met. As it is now, there are banks which simply relied on the 60% TDSR to approve or decline the loan.