A deleveraging nudge from fine-tuning of TDSR rules on refinancing

The Monetary Authority of Singapore’s recent fine-tuning of refinancing rules relating to the total debt servicing ratio (TDSR) governing property loans is a strong nudge towards deleveraging.

Stretched borrowers who hold investment properties will have to think about actively managing down their debt, especially as rental income is under pressure and economic growth is easing. Far from stimulating demand for new housing loans, the move also acts as a wake-up call for those inching precariously close to the debt-income ceiling set by the regulator.

To allow borrowers more flexibility in managing their debt obligations, MAS this month fine-tuned the three-year-old TDSR such that all home owners and holders of investment properties will be able to seek refinancing at better terms even when their TDSR limit crosses 60 per cent.

But there are two conditions for refinancing of investment properties above the threshold. Besides having to fulfil his financial institution’s credit assessment, the borrower must repay at least 3 per cent of the outstanding balance over a maximum of three years. This is on top of existing monthly instalment payments, and comes up roughly to about an added year of mortgage payments. The 3 per cent reflects the medium-term interest rate.

In 2014, about a year after TDSR came into effect, MAS allowed refinancing for borrowers whose repayments for property loans exceeded 60 per cent of their income before TDSR came into force. Borrowers for investment property loans could, during the transition period ending June 30, 2017, refinance above the TDSR threshold if the borrower commited himself to a debt reduction plan. This rule is now superceded by the recent refinancing fine-tuning, which applies regardless of when the property was purchased.

Among the changes in the latest tweak is that MAS has now set a rate at which highly-leveraged borrowers who hold investment properties must cut debt..

The TDSR model is set to stay. MAS took pains to stress that the latest move was not meant to relax cooling measures, with TDSR still in place for new loans. And the reasoning is sound. TDSR is meant to guide debt management, so if parts of it unintentionally impede that process – in this case, in preventing refinancing that could pare debt – MAS should remove the friction.

TDSR is a ratio. It is not just the debt repayment that affects the proportion. The amount of income that a borrower earns also determines whether his or her debt meets TDSR rules. In the years before TDSR, several borrowers of investment properties effectively made money off cheap debt by renting out their investment property. Today, the most common benchmark pricing housing loans, Sibor – while still low – has about doubled from 2013, when TDSR came into effect. Rates will rise as the Federal Reserve lifts rates, albeit at a gradual pace. Meanwhile, from the peak of January 2013, rents for private non-landed homes have fallen 16.9 per cent as at July.

Some property investors are no doubt on a knife edge. The adjustment by MAS ensures refinancing remains an option for the overleveraged borrowers, but in doing so, forces rigid discipline in cutting debt.

To be clear, most households in Singapore are managing their debt well, by TDSR standards. But 5-10 per cent of households here are under pressure and have already borrowed above the 60 per cent limit, showed MAS data in late 2015. Among them is likely a select group of PMETs (professionals, managers, executives and technicians) who are mired in debt, and face the prospect of transitioning to a lower-paying job as economic conditions deteriorate. For these households, cutting debt that has fuelled their property investment will be painful. But it still beats taking a huge loss on a fire sale.

Households that are close to breaching TDSR, or have breadwinners possibly losing significant income over the next 12 months – from a job loss, much lower bonuses, or a switch in jobs – should seriously consider refinancing before breaching the ratio. They may escape the set 3 per cent deleveraging rule. In staying within the 60 per cent limit, paradoxically, they’ll have the most flexibility to adjust their debt by their own time and discipline (all assuming generously that such discipline is in place in these households).

MAS’s latest move inadvertently sparks the question of whether cooling measures should be rolled back. There is a supply glut in residential properties. Vacancy rates for private residential units in the second quarter was at a 16-year high of 8.9 per cent. Mortgagee sales have risen.

But prices have not reflected that reality. As MAS has pointed out, property prices have fallen just 9.4 per cent from the peak in the third quarter of 2013. This followed a surge of 60 per cent between 2009 and 2013; over the same period, nominal income was up just 30 per cent.

Consultants have said most investors still have debt headroom and are holding on to properties, rather than selling. Households here also have cash on hand that is, as a conservative estimate, more than S$300 billion, showed reports and MAS data.

No surprises, then, that MAS has said ad nauseam cooling measures will stay. The TDSR tweak supports stability, and a soft landing in the property market. A managed, gradual, approach should sit well with a central bank.

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