TDSR Causes Home Loan Refinancing Hardships

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TDSR Causes Home Loan Refinancing Hardships

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Total Debt Servicing Ratio (TDSR)

According to MAS, if you were to refinance to another bank or simply to reprice with the same bank

You will have to pass a TDSR of not more than 60%.







Refinancing Could Hurt Some People

• People who had bought their properties using 35 years loan tenure or under a less stringent Debt Servicing ratio of 60%.

Note: Debt Servicing ratio of 60% is not the same as Total Debt Servicing Ratio of 60%.







• Many people who have borrowed under interest-only financing would also be hurt with increase in interest rates as they cannot switch.

• If they do switch, they will incur higher monthly servicing cost, and therefore fail the TDSR threshold of ≤60%.







Case Of Interest-only Borrowing

Many of these financial institutions provide a “Step-up” home loan package, so these property owners are now stuck with increased financing costs and yet cannot refinance their home loan due to failing the new TDSR rule.

All refinancing will have to pass the TDSR rule.







Case Of 30-year Loan Refinancing

This individual got approved under a Debt servicing ratio (DSR) of 60% based on a lower interest rate set at 2%.

The monthly installment works out to be $3,252 per month.

This means that based on DSR, this person is only at 36.14%. This calculation does not consider his car loan.







DSR Of 60% Using 2% Interest Rate To Justify








He earns $9,000 a month and pays $3,255.65 monthly for his mortgage.

Even if the bank takes into consideration his car loan of $1,500 a month for the computation of the Total Debt Servicing Ratio, he would still PASS at 55.70%.








But with the new rule, the TDSR must be assessed using a prescribed rate.

According to MAS, the financial institution must “apply a specified medium-term interest rate or the prevailing market interest rate, whichever is higher, to the property loan that the borrower is applying for when calculating the TDSR”.








This medium-term rate is 3.5% for housing loans and 4.5% for non-residential property loans.







TDSR at 3.5%







So if we use 3.5% as the assessment interest rate

Mr. Tan Ah Kow, will fail TDSR at 74.44%.

This means that Mr Tan cannot refinance with the current bank to reap interest savings.







If the bank starts to raise the interest rate on his current loan

He is compelled to pay the higher rate as he is not eligible to refinance.







In Summary

While the MAS means well to put in place regulation to ensure financial prudence amongst financial institutions,

this new rule actually traps a group of property owners who now cannot refinance to cheaper rates and are trapped by the banks that first offered them these highly leveraged lending.







And we're not even talking about extreme cases.

In all measure, Mr. Tan Ah Kow earns a decent salary at $9,000 a month and is considered a high income earner.







This scenario actually benefits the banks that initially took the risks to lend more aggressively

They now have a group of home owners who cannot refinance and are trapped in higher rates through the higher spread charged by the bank.

Because







Isn't it ironic that the regulation ended up hurting those people who took the loan rather than impose financial prudence on the aggressive financial institutions?

This is like telling the bad boy to behave so that you will give him a sweet.







But the bad boy knows that he will be given a sweet if he is bad, he may test the system again to be given get another sweet. This is the negative reinforcement.







Do check out the consultants at:

iCompareLoan

They can help you to Compare Singapore Home Loans and assess whether you will be able to refinance to save on interest

costs







About Property Buyer Mortgage Consultants

Property Buyer Mortgage Consultants is a research focused independent mortgage broker. We emphasize a consultative approach where we match our client’s financial situation with the best fit mortgage loan, not simply a cheap loan.

We also help property buyers in their buying process helping them avoid pitfalls from unscrupulous property agents. (We are not property agents, therefore there is no conflict of interests.)

We also developed our proprietary home loan reporting tool which provides amongst other things, 23 years Sibor history as well as 6 years worth of SOR.

Our service is free to you as banks pay us a commission on loan deals completed. Banks in turn save on staffing cost as we are not on their payroll. www.PropertyBuyer.com.sg/mortgagewww.SingaporeHomeLoan.netwww.iCompareLoan.com/consultant/




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http://www.singaporehomeloan.net/

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TDSR Causes Home Loan Refinancing Hardships