What you need to know about MAS Debt Servicing Framework

The Monetary Authority of Singapore (MAS) on June 28 2013 introduced a Total Debt Servicing Ratio (TDSR) framework for property loans applicable to all types of properties. The TDSR framework was a result of inspections on financial institutions' (FIs) practices around debt servicing ratios and credit underwriting. FIs are expected to adhere to the methodology for computing the TDSR.

Many property buyers and investors will want to know the impact of the TDSR framework. We are examining how the framework and its prescribed methodology affects the financing of new residential property purchases and the perceived impact.

Total debt obligations
All debt obligations will now be declared as-is. FIs are expected to check with the credit bureau and borrowers to submit the supporting documents. Estimation of debt obligations are no longer allowed.

Impact is medium.

Medium-term interest rate of 3.5%
Using 3.5% to calculate the borrowers repayment capability seemed strict than the existing teaser rates. However, FIs are already using a higher rate in this assessment. In fact, some are using 3.5%.

Impact is low.

30% Haircut on variable income
Implementing a haircut on variable income is an existing practice by FIs. MAS with this latest measure, is standardizing the haircut to be 30%.

Impact is low.

Haircut on financial assets
Using assets to borrow or also known as asset-based lending has been a common practice. This allowed FIs to recognize the value from these assets as income in addition to the borrowers salary and variable income, thus increasing the borrowing capability. At least one bank was cutting the hair of stocks at 30%. MAS is requiring FIs to apply standardized haircuts depending on pledged and unplugged assets and type of assets.

Impact is medium.

TDSR threshold of 60%
TDSR is not a new metric as it has been used in the evaluation of borrowing capability by FIs. Some FIs uses 50% threshold, meaning the total outstanding debt obligations cannot exceed half of the monthly gross income. Therefore, the 60% TDSR threshold is not as strict as it seemed.

Impact is low.

Mortgagors and borrowers
Since the last few cooling measures, some purchases tried to circumvent the loan-to-value (LTV) limit by obtaining housing loans with borrowers that can borrow at a higher LTV. This is possible where the borrowers have lesser or no housing loan compared to the mortgagors. MAS now requires the borrowers to be mortgagors too and checks are to be made on the OTP and Land Titles Act Mortgage document. It is worth to note that not many banks allowed this approach previously.

Impact is medium.

Guarantors
This is another scenario where some purchasers are bringing in guarantors to secure higher LTV limits than what the mortgagors would obtain due to their income or lower LTV limits. The debt obligations by the guarantors did not affect their borrowing limits for their next purchase, hence the rising popularity of this approach. Only a handful of banks practiced the guarantor approach. MAS has now moved to ensure guarantors must now be considered as borrowers, therefore affecting their future borrowing limits.

Impact is medium.

Income-weighted average age
Previously, there was no consistent approach as banks were basing the tenure on the youngest, oldest or average age. Based on borrowers' gross income and their age, this measure tilts the loan tenure to the borrower with higher income. A borrower with age 60 earning $10,000.00 a month and another age 30 with $5,000.00 a month will now have an income-weighted average age of 50, resulting in a shorter tenure. Their tenure could have been based on age 30 or 45.

Impact is medium.