Home buyers, clueless about TDSR? Read on

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1 Home buyers, clueless about TDSR? Read on Published on May 25, 2014 By Cheryl Ong Know what goes into calculating eligibility and common mistakes loan applicants make If the latest official data is anything to go by, buyers are no longer as nervous about signing up for a new home, despite mortgage lending rules that have tamed a once-buoyant market. Last month, buyers returned to the market with more vigour, purchasing 745 new homes up 60 per cent from March s figure. The sales were also about 54 per cent higher than the 482 units sold last July, the month after the Total Debt Servicing Ratio (TDSR) was introduced. But 10 months after these measures came in, many still do not have a proper grasp of the new home financing rules. A survey by United Overseas Bank (UOB) earlier this month showed that one in three home buyers was unclear about or even unaware of the TDSR framework. The term implies that all of a prospective borrower s debt needs to be considered, said Mr Joseph Wong, head of consumer credit risk, OCBC Bank. It also caps a borrower s total monthly debt repayments at 60 per cent of his gross monthly income. The respondents, a mix of first-time and seasoned home buyers, said they did not understand how the rules applied to their financial situations. The Sunday Times looks at what exactly goes into calculating one s eligibility for that home loan, and the common mistakes that borrowers make when they are applying for a loan.

2 Credit cards Swiping credit cards incurs one of the most common sort of debt, since almost everyone has a credit card. Yet, many home buyers do not understand that credit card spending is accounted for as extra debt when applying for a mortgage, said Ms Chia Siew Cheng, head of secured loans and personal financial services at UOB. As a result, potential borrowers often do not bring along their credit card statements from all card issuers, she said. If a borrower has an outstanding credit card bill of $1,000, the minimum monthly payment will be about 3 per cent of the entire amount. Though this percentage may vary between banks, they typically compare the derived sum with a common benchmark of $50. The higher amount will be the minimum amount due for that month, said Mr Wong. Using the example above, the borrower would be charged $50 instead of $30 and this will go towards his total debt obligations. But because monthly instalments are based on how much is spent on a card and not the credit limit it does not matter if a home loan applicant has multiple credit cards with high credit limits as long as he has not used any, said OCBC. The situation that Ms Flora Wong, 29, who bought a flat recently, found herself in four months ago highlights another common misconception. Ms Wong said she thought paying off all her credit card bills just before applying for a mortgage would mean that she had no outstanding debts, but that was not the case. OCBC noted that if the borrower s application for a mortgage was made within the same month of clearing the credit card debt, the latest monthly instalment would still be counted. Borrowers who have paid their secured facilities and loans at least two months ahead of the loan application can certainly improve their chances of

3 securing that loan, said Ms Linda Lee, executive director of deposits and secured lending at DBS Bank. Personal loans Debts such as cash loans, car loans and study loans are regarded as personal loans. Unlike credit cards, monies from these loans are normally disbursed in full at the outset. So, banks charge a fixed monthly instalment based on the lump sum. These repayments will be factored into computing the total debt one owes, said Mr Wong, and not the entire loan amount. Sole proprietors should also note that the monthly instalments for loans taken to fund their businesses will be considered. Mortgages Anyone who is not buying his first home is likely to have an existing mortgage. If that has not been paid off yet, the monthly instalments would, of course, be added to the equation, on top of the expected repayments for the new home loan being applied for. This also applies to loans from banks in Singapore to finance purchases of overseas properties, said OCBC s Mr Wong. Mortgages as with any loan taken from foreign banks overseas need to be included, and borrowers have to declare details on such loans to their banks. Another exception is made for buyers of executive condominiums a hybrid of public and private housing and resale Housing Board flats. Because these buyers are required to sell any flat that they already own when the executive condominium or resale flat is ready, banks exclude the existing

4 mortgage instalments when deciding how much money such buyers get to borrow. Secured overdrafts Overdraft facilities, such as those where property, bank deposits or shares are being used as collateral, are granted an approved credit limit by the credit provider. Like credit cards, no debt is incurred unless money is withdrawn. The sum that will be included in one s TDSR calculations is the monthly interest on the amount taken out. Guarantor Property agent Bernard Ho pointed out that some buyers might forget that being a guarantor means extra debt, even if the loan is not taken out for their own purposes. Buyers should note that the bank needs to account for the possibility of a default, which means that the guarantor will have to pay for the loan in the end. That is also debt, he said. So, 20 per cent of the monthly repayment on the mortgage, car or study loan being guaranteed will be treated as debt relating to the guarantor, said UOB s Ms Chia. Things to do Many banks have checklists prepared for clients to simplify the application process. Besides consulting a mortgage specialist, Ms Lee advises home seekers to first obtain a copy of their credit report from the Credit Bureau. Risk grades range from AA to HH, with AA having the lowest probability of default, she said, adding that by having a clear understanding of their credit status, customers can also take action to improve their creditworthiness if needed.

5 The Credit Bureau s records are updated monthly, so facilities terminated just before a mortgage application could still be active on the report. In such cases, applicants may ask the bank to issue a letter of confirmation on the terminated card, but that could take time. It may be easier to take a loan from a bank where one holds the majority of his banking relationships, as such account statuses are readily available in their internal records, Ms Lee said. Source: The Sunday Times (C) Singapore Press Holdings Limited. Reproduced with permission.