How necessary is the exemption of the TDSR rules?

Financing restrictions introduced by MAS under the context of prudent borrowing are usually made effective the following day. However, it is not uncommon to see subsequent fine-tuning after the announcement.

Motor vehicle loan is a good example:

– On 25 February 2013, MAS imposed financing restrictions on car loans that cap maximum loan-to-value to 50 or 60 percent and loan tenure to five years.

– On March 8, after “carefully considered the feedback received from different groups”, the physically disabled and their caregivers are exempted from such restrictions.

– On April 5, after “taking into account the distinct conditions in the used car market”, a grace period of 60 days was granted for the purchase of used cars that were inventories before February 25.

The TDSR framework was announced in June 2013. But it was not until eight months later that some details were fine-tuned after “receiving feedback from borrowers who face challenges refinancing loans for owner-occupied properties”.

Anyway, all lenders and borrowers are now used to MAS being the ‘modifying authority’ of financing restrictions introduced in Singapore. Although MAS stands firm on their policies, they know that their objections can result in tweaks for some terms and conditions.

So the question is: Are more fine-tuning announcements on the way?


What is the exemption this time?

With immediate effect, any borrower who bought his owner-occupied residential property before 29 June 2013 is exempted from the TDSR rules during refinancing of this property, even if he owns more than one property and has other outstanding property loan. He can also enjoy the same remaining tenure in his refinanced loan.

Refinancing of all investment property loans above the 60 percent TDSR threshold is allowed during the transition period until 30 June 2017, provided that:

1. The option to purchase was granted before 29 June 2013;

2. The borrower commits to a debt reduction plan with the financial institution (FI) during refinancing; and

3. The borrower fulfils the FI’s credit assessment.


How can property owners benefit from the exemption?

The exemption is meant to enable home owners to refinance their properties when interest rates go up. On the other hand, property investors are given sufficient time to ‘right-size’ their loans when the 4-year lock-in period of their loans expires in 2017. So they won’t be unable to service or refinance their loans and suffer a huge loss in a forced sell.

With interest rates still going around two percent now, not many property owners will bother to refinance their properties. For those who bought their properties recently, their housing loans are most likely still under the lock-in period of 2 to 4 years. As the saying goes, you only cross that bridge when you come to it.

It is only when interest rates shoot up to over 3 or 4 percent that owners will start feeling the pain. In 2006 and 2007, every few months the banks would inform their borrowers a revised interest rate and a higher monthly repayment, to be effective the following month. Foreign banks were even more aggressive in updating their interest rates.

Mortgagors should be aware of the fact that application for refinancing or repricing takes time. When the new loan package is finally approved, it can only be made effective three months later.


Who doesn’t benefit much from the exemption?

1. Developers, agents and sellers

It is an exemption, not an abortion. And the exemption doesn’t apply across the board to include all new property purchases. Buying new projects launched by developers or resale units in the market after 29 June 2013 are still subject to the limit of the TDSR rules.

2. Other buyers

Buyers who unfortunately bought after the magic date of 29 June 2013 or have purchased commercial properties still have to go through the tedious TDSR evaluation process during refinancing.

Buyers waiting on the sidelines are unlikely to see many units selling at depressed prices due to failure in securing refinancing. There may not be a drastic drop in property prices this year.

3. Financial institutions

FIs are relieved that they can probably meet their sales quota on refinancing of home loans now. But not the quota on new housing loans.

Even if the target group of the TDSR exemption fails to pass the stress test, FIs are now unable to hold them down to monthly repayments with higher and higher interest rates.

Well, there is no clear definition and guideline on ‘debt-reduction plan’ and ‘credit assessment’. At least the FIs do not have to give up too much business from their overleveraged mortgagors with no holding power, especially after toiling for weeks with all that paperwork!