http://www.straitstimes.com/archive/...loans-20130629

Fresh curbs on property loans

Factoring in all debt obligations among steps to encourage financial prudence

Published on Jun 29, 2013

By Aaron Low Assistant Money Editor


TOUGHER rules have been imposed on mortgages to stop home buyers getting in too deep and to plug loopholes that let people dodge tougher loan limits on second and subsequent properties.

The new curbs are not seen by the Government as another step to cool soaring prices, but property experts say they will still have some effect by reining in borrowing.

The rules, which take effect today, demand that lenders consider a borrower's total debt obligations, including other mortgages and loans for cars, before granting a new home loan.

Banks will not be able to approve a loan if the monthly repayments of a buyer's total debt obligations exceed 60 per cent of his gross monthly income.

Take a property buyer who has a monthly income of $10,000 and debt obligations, including his car, credit card and other such loans, of $3,000.

If the new mortgage's monthly repayment exceeds $3,000, that would bring his total repayments to over $6,000 - and total debt obligations to over 60 per cent.

Banks would then have to relook how much they can lend to him under the new Total Debt Servicing Ratio framework - which applies to loans for all property types - announced by the Monetary Authority of Singapore (MAS) last night.

MAS said the rules also apply to borrowers looking to refinance, and said the 60 per cent limit will be reviewed over time.

Borrowers on a mortgage will also now have to be named as the owners of the property.

This and other changes to the loan-to-valuation rules are to prevent borrowers from getting round tougher limits for second and subsequent housing loans.

The changes will prevent parents from using their children's names to buy a second property, said Orange Tee's head of research and consultancy Christine Li.

"The old rules essentially encouraged two generations to service one housing loan," she said. "The move plugs the loophole and will encourage more prudent borrowing on home purchases."

MAS said last night that the new framework "will strengthen credit underwriting practices by financial institutions and encourage financial prudence among borrowers".

It added that its checks of the banks' residential loans last year showed that different lenders used different standards to approve property loans.

The new rules, which follow seven rounds of cooling measures, are aimed at giving financial institutions a "robust basis for assessing the debt ability of borrowers applying for property loans".

MAS said the measures are structural and meant for the long term. However, it said the current loan-to-valuation limits for housing loans are not permanent and will be reviewed depending on the state of the property market.

MAS noted that while the new rules "are not targeted to address the current property cycle, they are consistent with previous measures aimed at promoting sustainable conditions in the property market".

These moves to cool the red- hot market - the latest came in January - have only partially dampened demand as the J Gateway, a new 99-year leasehold development in Jurong East, showed yesterday when 99 per cent of the units were sold on the first day of its launch.

Barclays Capital economist Joey Chew noted that the central bank is keeping an eye on the prospect of higher interest rates following signals from the United States Federal Reserve.

"Investors who were intending to enter the property market now to lock in a low rate of interest may be thwarted, particularly if they are already highly leveraged."

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Background story

NEW DEBT SERVICING FRAMEWORK

Total Debt Servicing Ratio (TDSR) framework to be used

Consider monthly repayments of new loan and all other debt.
Calculate new loan repayments using medium-term interest rate (3.5per cent for home loans) or prevailing interest rate, whichever is higher.

Discount variable income and bonuses by at least 30 per cent.

Discount financial assets if used in calculating income.

Loan-to-valuation rule changes

Borrower of loan must be mortgagor of the home.
If borrower fails to meet TDSR threshold, his guarantor to be included as co-borrower.
Use income-weighted average age of joint borrowers in deciding loan tenure.

For instance, if the father has a higher income than his son, it may mean an older average age and shorter loan tenure.