MAS has just announced the introduction of a debt servicing ratio framework, with effect from tomorrow, 29 June 2013.
Whilst the cap of 60% on debt servicing ratios (monthly debt obligations versus monthly income) is not something drastically different from banks’ current practices, my focus would be the impact of the following restrictions:-
- borrowers named on a property loan must now also be mortgagors (ie. co-owners) of the residential property for which the loan is taken;
- “guarantors” who are standing guarantee for borrowers otherwise assessed by the bank at the point of application for the housing loan not to meet the TDSR threshold for a property loan are to be brought in as co-borrowers (and therefore, must also become co-owners); and
- in the case of joint borrowers, that banks use the income-weighted average age of borrowers (based on borrowers’ gross monthly income) when applying the rules on loan tenure (i.e. lower LTV-ceilings for loan tenures exceeding 30 years or extending past a borrower’s 65th birthday ).
Could it be that the authorities are clamping down on the dangerous practice of adding younger/ wealthier co-borrowers and guarantors with the intent of circumventing LTV-restrictions? This was a practice I highlighted in my 16th June 2013 post: https://natashagoh.com/2013/06/16/the-all-monies-mortgage-interest-rate-hikes-are-not-the-only-risk/#more-1383
Might be sheer coincidence that the announcement comes right at the end of a stunning one-day sell-out at MCL Land’s 738-unit J-Gateway project, in any case, there is little doubt that the authorities are monitoring the real estate market with eagle eyes, and will take decisive action whenever they see fit.
In this instance, I feel like the authorities are getting a little more sophisticated in their approach to ensuring a soft landing in the real estate market. Today’s announcement, by its nature, will not cause as huge a hoo-ha as the last cooling measures. But its point-of-attack has more insidious consequences. By requiring all borrowers to be mortgagors (i.e. co-owners), and all guarantors supporting borrowers who would on their own be unable to support the loan required to be co-borrowers, MAS has in one fell swoop struck back at those seeking to circumvent the rules on property loans or avoid ABSD. Some examples of popular “tricks” that have become more difficult to successfully carry out under the new rules:-
1) married couples buying 2 properties, each in single name, so as to avoid ABSD (they must now have sufficient income to support the loans on their own if they wish to do so.);
2) wealthy parents stepping in as guarantors/borrowers to support their children in buying pricier homes outside the younger party’s own income-range (if they wish to do so now, they must be added as co-owners (mortgagors) and would thus incur ABSD, assuming they already own at least one other residential property);
3) older/retired parents using their children’s names to take up larger loans (by avoiding the 65th birthday restriction) or buy a second investment property without incurring ABSD (if their children have yet to own any residential property under their own names).
For more details on MAS’ announcement, kindly refer to the official website at: