Under the latest measures, lending practices by Financial Institutions (FIs) have been tightened with the following restrictions:

The Total Debt Servicing Ratio (TDSR) Becomes Standard Practice

The TDSR is the calculation of what percentage of your income goes towards paying off debt – including car loans, renovation loans, education loans, credit card debt, and other secured/unsecured loans.

How does TDSR apply to your home loan?

Let’s say you make $4,000 a month. The TDSR limit is currently set at 60%, meaning that your “buffer” for total debts is $2,400 (60% X $4,000 = $2,400).

If your monthly debt repayments are $600 (car loan) and $700 (renovation loan), you’ll have only $1,100 to use towards a monthly home loan repayment ($2,400 – ($600 + $700) = $1,100).

This means that if your home loan payment exceeds $1,100 per month, you’ll need to lower the amount you can borrow (loan quantum) until your monthly repayments fall under $1,100 a month.

If you are earning $4,000 a month and you are servicing a car loan of $2500 monthly, this means your TDSR is already at 62.5% and you will not qualify for a housing loan.

In short, the TSDR is about having your (total debt commitments / your or combined income) < 60%.

If in the future, MAS revises the TSDR to be at a maximum of say 50%, it will result in being able to borrow even less with the same amount of income.

If you are wondering how much your income qualifies you for in terms of loan quantum, check out the MoneySmart Loan Affordability Calculator. 

Loan Tenures for Joint Applicants Now Based on Income Weighted Average and the Age of Borrowers

The number of years you need to pay off your home loan (loan tenure) affects the Loan-to-Value (LTV) percentage a bank can approve you for. If the loan tenure extends beyond the age of 65, the LTV percentage you can borrow is reduced.

For example, if you’re 40 and you want to take out a 30-year loan, your LTV will be reduced because the loan tenure extends past age 65. LTV will be reduced from 75% to a maximum of 55% for your first mortgage loan or from 45% to 25% if its your second mortgage loan. To get a maximum loan of 75%, you can only opt for a loan tenure of 25years or shorter.

But if you want to buy your first home with your partner or family or friends, ONLY the ages of income-earning applicants is averaged.

For example, if you’re 25 earning $5,000 a month and want to purchase a home jointly with your father, whom is 50 and earning $3,000 a month, the bank will calculate tenure as:

(Income/Gross income x Age) of applicant A + (Income/Gross income x Age) of applicant B. ($5000/$8000 x 25) + ($3000/$8000 x 50) = 15.625 + 18.75 = 34.375. So in this case the average age is 35.

With an average age of 35, you can apply for a 30-year loan.

However, if you’re 25 earning $3,000 a month and want to purchase a home jointly with your father, who is 50 and is earning $5,000 a month, the bank compute tenure as:

($3000/$8000 x 25) + ($5000/$8000 x 50) = 9.375 + 31.25 = 40.625. Which in this case, the average age is 41.

You get a 24-year loan instead of a 30-year loan.

How Does The Bank Compute Your Income For The TDSR Test?

If you don’t have a fixed monthly salary, the bank will classify you as having variable income. This category includes commissions-based salesmen, freelancers, business owners, or landlords who earn income solely from rent etc

All fixed components (such as basic pay, fixed allowances) of your income can be taken at 100% and variable components (commissions, AWS) are considered at 70%.

For variable monthly income, lenders will ONLY consider 70% of your monthly income for a home loan. So if you make $4,000 a month, banks will only factor $2,800 (70% X $4,000 = $2,800) of your salary to determine the amount you can borrow.

Or for an employed person, e.g. basic salary $4,000 with an average commission of $1,000 a month, his income for TDSR computation would be $4,0000 x 100% + $1,000 x 70%, which works out to be $4,700.

Owners Need to be Borrowers and Guarantors Need to be Joint-Borrowers

MAS now requires all intended borrowers of the housing loan to be listed as owners of the property. Guarantors are a thing of the past, and no longer allowed.

A typical example would be a father wanting to secure a property for his son who has not started earning income yet, or has insufficient income to qualify for the required loan quantum. The father would, under the latest rules, be required to come in as a borrower and not a guarantor, and all borrowers must be owners as well. If the father owns a property at present under his own name, in this example, he would have to be considered a 2^nd time buyer and subject to the prevailing rules as such.

The rule makes it much harder for people to use proxies to buy properties so that they can borrow at maximum 75% LTV and avoid paying Additional Buyer Stamp Duties (ABSD).

The Interest Rate Benchmark for Stress Testing is Raised

Banks don’t use the prevailing interest rate to calculate TDSR, they use a “stress test” interest rate (set by MAS), which tests the ability of borrowers to handle any sudden rise in interest rates. This is done in lieu of the fact that interest may be low now, but is set to increase in the years to come.

That’s why banks calculate your TDSR based on higher interest rates, to test your ability to meet your monthly mortgage repayments in the event that interest rates rise.

MAS has standardized the stress test to the following levels:

• For residential properties, all banks must calculate your TDSR on a stress test rate of 3.5%.
• For commercial properties, all banks must calculate your TDSR on a stress test rate of 4.5%.

This ensures that people have the ability to repay their loan commitments in an increased interest rate environment.

Required Application Documentation Has Become More Stringent

Banks have to be more stringent in the documents requested for loan applications, meaning the days of “fudging” the numbers on your monthly loan repayments are over. So if your monthly car loan repayment is $600, they’ll no longer take your word that it’s “only $550.”

This means that you’ll have to have a good document organizer because the banks will demand documentation proof of your outstanding debt liabilities to factor into your TDSR computation. This is not limited to just car loans, but to any other debt commitments such as personal loans, renovation loans etc or credit facilities such as credit cards, overdrafts etc.

Additional Buyer’s Stamp Duty (ABSD)

MAS has introduced ABSD for quite some time but have revised the tax rate. This has to be paid on top of the usual Buyer Stamp Duty (BSD).

This is designed to make it harder for any one to own a 2nd property and beyond and also to discourage foreigners from buying properties in Singapore. High transaction volumes will drive home prices up and it will be very hard for first time home buyers to afford their very first house.

So if you’re a Singapore PR who wants to buy your first home, you’ll have to pay an additional 5% Additional Buyer’s Stamp Duty (ABSD).

Fortunately, are the exemptions

• Jointly purchasing the property with a Singaporean Spouse. Proof of marriage is to be presented for the waiver of ABSD.
• Due to Free Trade Agreements, Nationals and PRs of Iceland, Liechtenstein, Norway, Switzerland and Nationals of United States of America will be awarded the same treatment as a Singapore Citizen. This means the nationals of these countries do not need to pay the ABSD of 20% under the foreigner category.

Further Restrictions on PR’s Ownership of HDB Flats

PR’s have to fulfil 3 full years of PR before they are allowed to purchase a HDB property on the resale market. This rule applies for all owners as well as occupiers.

One example would be a foreigner coming to work in Singapore and obtaining PR status. Should this person fulfil 3 years of PR status but have a spouse who is PR but has not fulfilled the minimum of 3 years, they will not be allowed to purchase a HDB.