Out-Law News 2 min. read

Singapore banks to take borrowers' outstanding debts into account before granting property loans


New restrictions on property loans have come into force in Singapore, intended to reduce demand for investment properties and curb the rise in the cost of the country's social housing stock.

A new Total Debt Servicing Ratio (TDSR) requires loan providers to take borrowers' other outstanding debts into account before granting property loans. Stricter rules will also apply in relation to Loan to Value (LTV) limits on housing loans, to ensure that borrowers are unable to get around stricter limits on loans for second and subsequent properties by purchasing properties through investment vehicles or in the names of their children.

The Monetary Authority of Singapore (MAS) said that the new rules would help "strengthen credit underwriting practices by [banks] and encourage financial prudence among borrowers".

"The TDSR framework will provide [banks] a robust basis for assessing the debt servicing ability of borrowers applying for property loans, taking into consideration their other outstanding debt obligations," MAS said.

"The coverage of the TDSR framework will be more comprehensive than [banks'] current practice. The TDSR will apply to the loans for the purchase of all types of property, loans secured on property, and the re-financing of all such loans," it said.

Under the new framework, total monthly property loan repayments should not exceed 60% of a buyer's income. Repayments which work out at more than this amount will be considered "imprudent" by MAS, the regulator said. MAS will "monitor and review" the 60% threshold, with a view to "further encouraging financial prudence", it said.

MAS first introduced stricter LTV ratios in January 2013, following a thematic inspection of banks' residential property loan portfolios the previous year. During its review, MAS found that although banks generally had sound policies to assess the creditworthiness of borrowers in place, there were "uneven practices" and areas for potential improvement in relation to credit underwriting practices and the application of debt servicing ratios.

Under the new regime, the LTV will take into account the income of all borrowers that are party to the loan. In addition, at least one of the borrowers named on the loan will have to be the mortgagor of the residential property for which that loan is taken, and guarantors will have to be included as co-borrowers. This will prevent the person who is benefitting from the property circumventing the rules by taking out the loan in another name.

LTV limits on housing loans themselves will remain unchanged under the new regime. As of January 2013, these stand at 50% for individuals with one outstanding housing loan and 40% for those with two or more outstanding loans. Where the loan tenure exceeds 30 years or extends beyond the borrower turning 65, a 20% LTV limit applies. Under the new regime, banks will be asked to use the income-weighted average age of joint borrowers for the purposes of applying the loan tenure rules.

Speaking to Channel News Asia, National Development Minister Khaw Boon Wan said that the new rules were expected to be "quite permanent".

"Our observation is I think those people buying for home ownership is not an issue, but we do have buyers who are stretching themselves, buying second property, third property for investments, and those are the people we worry about, because when interest rates go up, and when they find themselves [being unable to] afford the increased mortgage, what would they do?" he said.

"They may be forced to liquidate, and who knows, if that time combines with a time where there's a bit of a glut in the property market, they may suffer financially. So I think the new rules are a good reminder," he said.

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