July 1, 2013
The Monetary Authority of Singapore (MAS) announced on 28 June 2013 the introduction of further measures to fine-tune residential property loan rules, which came into effect on 29 June 2013. MAS Notice 632 has been amended to reflect these new rules, and MAS has also issued a new Notice 645, setting out details as to how banks and financial institutions are to compute the total debt servicing ratio for property loans.
Amendments to MAS Notice 632
MAS Notice 632 applies to loans taken for the purchase of residential properties (Housing Loans) and loans which are not taken for the purchase of residential properties but are otherwise secured by residential properties (Equity Loans). With these most recent amendments, MAS has plugged certain loopholes which some borrowers have used to circumvent the reduced loan-to-value (LTV) limits introduced in the earlier rounds of cooling measures.
All guarantors must be borrowers
Any person who contributes towards any part of the monthly repayment instalment of a credit facility granted to another person who has been assessed by a bank to be unable to pay any part of such instalment must now be included and named as a co-borrower of the credit facility, and not just merely a guarantor.
This new rule applies to all Housing Loans where the option to purchase was granted on or after 29 June 2013 and to Equity Loans applied for on or after 29 June 2013, as well as to the re-financing of such Housing Loans and Equity Loans.
This amendment prevents a person from indirectly obtaining more than one 80% loan (assuming he is less than 35 years old and the loan tenure is less than 30 years) by being a guarantee under one loan (say, an 80% loan where the borrower is his wife, but he effectively pays all or part of the monthly instalments) and obtaining another 80% loan in his own name for another property.
All borrowers must be mortgagors
MAS Notice 632 has always made reference to the “Borrower”, who is the person applying for the credit facility, but there was never a distinction made between a borrower and a mortgagor, as mortgagors were usually the borrowers of a property. However, with the various reductions in LTV limits in the last few years and the introduction of Additional Buyer’s Stamp Duty (ABSD), more and more property purchasers have turned to using family members’ names to purchase residential property, thus being able to obtain higher loans based on higher LTV limits and/or avoiding or reducing the amount of ABSD payable.
With the latest amendment, all borrowers of a Housing Loan, an Equity Loan, or a loan taken to re-finance a Housing Loan or an Equity Loan must now also be a mortgagor of the residential property for which the loan is taken. Similar to the rule on guarantors, this will also apply to all Housing Loans where the option to purchase was granted on or after 29 June 2013 and to Equity Loans applied for on or after 29 June 2013, as well as to the refinancing of such Housing Loans and Equity Loans.
The new rules effectively prevent one from circumventing the rules on lower LTV limits and/or avoiding or reducing the amount of ABSD payable.
It is interesting to note that where one is refinancing a ousing Loan, the above rules requiring all borrowers to be mortgagors and requiring guarantors to be borrowers only apply if the option to purchase for the residential property in question was granted on or after 29 June 2013. This would mean that someone who is re-financing a Housing Loan taken, say, in 2008 can still enter into a third-party mortgage, where the borrower need not be a mortgagor, and where the guarantor need not be brought in as a borrower.
One area which MAS did not address directly is the situation where a borrower (Party A) is applying for a credit facility in relation to one property (the second property), and is a mortgagor of another property (the first property), but without being a borrower under credit facilities granted for the purchase of the first property or otherwise secured by the first property. In such a situation, would a bank granting a facility for the purchase of the second property have to consider the outstanding amount of the credit facility secured by the first property in determining the LTV limit that it can grant to Party A? Arguably, yes, since in-principle, Party A is jointly and severally liable for the loan with the borrower of the first property (notwithstanding that he is not named as a borrower of that loan) and it boils down to the same reason for mandating that all guarantors must now be a borrower of a loan.
In determining a borrower’s monthly total debt obligations MAS did provide in MAS Notice 645 that, where a borrower is a guarantor, not less than 20% of the monthly repayment instalment of any other outstanding relevant credit facility in respect of which the borrower is a guarantor will have to be taken into consideration. In light of this, in the example above where a mortgagor is takin to being a guarantor, banks and financial institutions may have to consider taking into consideration the outstanding loan secured on the first property, in determining the LTV limit of the loan to be granted to Party A for the credit facility to be granted for the second property.
Introduction of loan tenure for Equity Loans
Equity Loans and loans which are taken to refinance an Equity Loan will now also be subject to a maximum tenure of 35 years. There was previously no limit on the tenure of an Equity Loan, and this new requirement was probably meant to tie in the rules on loan tenure with that for Housing Loans. However, an Equity Loan and a credit facility for the re-financing of an Equity Loan both cannot exceed 35 years, so it appears that one can keep re-financing an Equity Loan for a fresh term of 35 years each time.
Weighted average age of borrowers
Previously, there was no clear rule on how banks and financial institutions are to treat the age of borrowers in determining the loan tenure of a loan where there is more than one borrower, except that a “bank shall use the age of the borrowers that the bank uses for its credit assessment of the credit facility”. Some banks had used the youngest age, which resulted in a longer tenure, while some banks had used the oldest.
To address such inconsistency, under the amended rules, where there are two or more borrowers, banks and financial institutions will now have to use the weighted average of the ages of the borrowers, weighted based on their gross monthly income1. Hence, weight is given to both the age and income of the borrowers, and the average is taken.
Credit bureau checks
Previously, banks and financial institutions need not carry out checks with Credit Bureau (Singapore) or with Housing Development Board (HDB) if:
- they are granting loans equal to or less than the minimum 40% LTV and where the cash component payable by a purchaser is equal to or more than 25% of the purchase price of the property;
- they are granting a credit facility for the refinancing of a Housing Loan; and
- bridging loans (which are to be repaid within six months).
Now, they will still have to do so in the above situations, but only for purposes of assessing the credit worthiness of the borrower.
New MAS Notice 645
Apart from the amendments to MAS Notice 632, MAS introduced a new Notice 645, which also came into effect on 29 June 2013, and which sets out in detail the framework for computing the total debt servicing ratio (TDSR) for property loans. This somewhat complements the guidelines on LTV limits set out in MAS Notice 632 and is aimed at standardising credit underwriting practices, so that there is a consistent approach across all banks and financial institutions in determining a borrower’s ability to repay his loan.
A borrower’s TDSR is determined as follows:
The borrower’s monthly total debt obligations x 100%
The borrower’s gross monthly income
For a start, all property loans cannot exceed a TDSR threshold of 60%, to give both lenders and borrowers time to get used to this new regime. MAS has indicated that it will monitor and review the threshold over time.
This new framework will apply to a borrower of:
- any loan for the purchase of a property;
- any loan otherwise secured by property; and
- any re-financing loan in respect of a loan in (1) and (2).
It applies to loans to individuals, including sole proprietorships established inside and outside of Singapore, and any vehicle which is set up by a natural person solely to purchase property. It also applies to all types of property loans, whether residential or non-residential, and also covers properties both in and outside of Singapore.
The new rules set out in detail how banks and financial institutions should calculate a borrower’s monthly total debt obligations and gross monthly income, as well as how banks and financial institutions must verify such information.
Some of the measures which banks and financial institutions will have to observe when determining the TDSR are as follows:
- to calculate the monthly interest payable under the credit facility on the basis of a medium-term interest rate of 3.5% for residential property loans and 4.5% for non-residential property loans;
- where a borrower has variable income, a maximum of 70% of the average of his monthly variable income earned in the preceding 12 months can be taken into consideration in assessing his gross monthly income; and
- where a borrower has rental income, a maximum of 70% of the monthly rental income may be included as part of the gross monthly income, and there must be a remaining rental period of at least six months.
While MAS has set out an avenue for borrower’s self-declaration on his sources of income and debt obligations, banks still have to make their own independent checks with Credit Bureau (Singapore) and HDB (to verify a borrower’s debt obligations) and now obtain statements from the CPF Board and IRAS (to verify the sources of income of a borrower).
The tricky part is where a borrower has certain outstanding credit facilities which are obtained from a financial institution outside of Singapore, for example, where the borrower has an outstanding loan taken for the purchase of a property in Australia from a bank in Australia. Under the definition of “Outstanding Relevant Credit Facility”, such debts would have to be taken into consideration by a bank in determining the total debt obligation of the borrower.
How is a bank to verify such debts then? Given the framework of the regulation, the logical approach would be to rely on the borrower’s selfdeclaration and in this regard, the declaration ought to be made as comprehensive as possible, setting out questions which will prompt a borrower to give all the information that may help the bank in determining if there are any such overseas debt obligations, and perhaps in a similar vein, any overseas income. On the bank’s part, if there is additional information which puts the bank on notice that there may be overseas debt obligations on the part of the borrower, the bank should then ask for additional information and documentary evidence from the borrower in order to satisfy the bank of such debt. In the example above, the bank should ask for a letter of offer from the Australian bank, as well as the bank statements in relation to the outstanding loans.
Credit facilities exempted from the new framework
The TDSR rules will not apply to:
- bridging loans (which are to be repaid within six months); and
- a credit facility which is secured by a pool of collaterals which includes property, where the market valuation of the property comprises less than 50% of the market valuation of the pool of collaterals at the time of application of the said credit facility.
The TDSR threshold of 60% can also be exceeded in the case of a refinancing facility for the purchase of a residential property if:
- the option to purchase was granted prior to 29 June 2013;
- the residential property is the only property (including non-residential properties) that the borrower owns, either by himself or jointly with others;
- the borrower is one of the occupiers of the residential property;
- the borrower does not have any other outstanding credit facility (either in his own name or jointly with others) for the purchase of any property or the re-financing of such a credit facility, other than the residential property being re-financed; and
- the borrower does not have any other outstanding credit facility (either in his own name or jointly with others) otherwise secured by any property, including the residential property being re-financed, or the re-financing of such a credit facility2.
Banks and financial institutions are to obtain documentary evidence to verify all the above.
There is a similar exemption for borrowers who are owner-occupiers and are unable to meet the existing 30% mortgage servicing ratio limit on re-financing loans in respect of HDB flats.
These exceptions allow people with only one residential property (and no other properties, (residential or otherwise) and no other outstanding loans secured on properties (including Equity Loans secured on the residential property)) to be able to re-finance their Housing Loans, which were taken before these new rules were implemented, without which they may not be able to refinance their existing Housing Loans and enjoy lower interest rates.
Impact of changes
Banks and financial institutions already have their own internal assessment criteria of a borrower’s debt servicing ratio even before the implementation of the new rules on the TDSR, so it could be that the new rules which crystallise and standardise these criteria may not differ too much from what banks have already set in place, except that it gives the banks less room to grant exceptions. Probably when one approaches a bank for a loan now, there are likely to be less variances between the banks in the amount of loan that the banks can grant.
On the other hand, the amendments to MAS Notice 632 may seem like minor clarifications, but they could have a larger impact (than the new TDSR rules) in reducing the demand for property purchases and loans, in that one may not simply use another’s name to purchase property and/or to obtain a loan so easily.
Only time will reveal the true impact of these changes, but in the meantime, expect a longer waiting time for your loan applications to be approved!
1As determined in accordance with MAS Notice 645
2This exception is not set out in the MAS Notice 645 but has been included as in exception in MAS’ “Guidelines on the Application of Total Debt Servicing Ratio for Property Loans” under MAS Notices 645, 1115, 831 and 128 dated June 2013.