Home Loans - Brits get 3.5X Income, Singaporeans get 10X

In Defense of TDSR  

The Straits Times published a piece "Home loans harder to get with tighter rules" - http://www.straitstimes.com/news/singapore/housing/story/home-loans-harder-get-tighter-rules-20140414

Article had a Negative Slant
The overall slant of the article was quite negative. It focussed on higher rejection rates, longer times for approval and even quotes prominently a property agent saying "It's making the banks very frustrated, it's making it tough on the buyers and it's making it difficult for the agents to sell the units too."

Ironically, in the same article, the quotes from the various banks spokespersons did not give any hint of frustration. Maybe this agent is just unhappy that he/she can't sell more units.

What is TDSR?  
Just what is this TDSR? It stands for "Total Debt Servicing Ratio". In its simplest explanation, the TDSR limits a borrower's overall monthly debt replayment to no more than 60% of his gross monthly income.

This means that how much the bank can lend you is a direct function of how much you can repay monthly. How much you can repay monthly is a function of 1) how much you earn and 2) how much you spend. It is also a function of your age, because the younger you are, the more years you have to repay the loans.

Big Change from Before
The big change with TDSR is the requirement for the bank to probe into your personal financial affairs. They need documentary evidence to see how much you are currently spending a month. They need to take into account all your recurrent liabilities. That means they bank will want to see your credit card statements, other loans you have (e.g. car loans, unsecured loans) and other expenditures.

Before TDSR, life was much simpler. The banks only looked at how much you earned and then how many property loans you already have. They did not care about your other monthly expenditures. However, such an approach may not be prudent.

Loans Rejected Because Of High Expenditure
We sat down with our bankers to work through the TDSR requirements, as we wanted to see how much loan we could take. We had to provide many documents. Our banker told us that many of the clients had their loans rejected under the TDSR framework, because it was very apparent that they had many other expenditures (e.g. credit card bills, car loans) that now had to be taken into account.

Our Total Loan Quantum Exceeded Ten Times Gross Monthly Income
After the banker did all the calculations, I found out that the maximum total loan that we could get under the TDSR framework exceeded 10 times our combined annual income. Granted, our outgoings were not high, this quantum of loan is still large.

British Friends Get 3.5 Times Monthly Only
Our friends in the UK tell us that their banks at most lend 3.5 times combined annual income. Previously it was just 2.5X to 3X.  Looks like the credit market is easing a bit.  But that is still way less than what we can get in Singapore. The British people find it very hard to get on the property ladder for many reasons, one of which is the very tight credit market.

TDSR Is Important For Financial Stability
Overall, I think that the TDSR framework is very logical and it is an important piece to be implemented carefully to ensure that borrowers in Singapore are not over-stretched. By doing so, MAS can ensure that the financial system is more stable, with sufficient buffers, so that even if there is an economic downturn, we will not get hit with a systemic risk of financial sector collapse.

TDSR Is Here To Stay
Further, I think TDSR is here to stay.  The property cooling measures are temporary.  Government will adjust these measures and even lift them completely once the market stabilises or cools down.  But TDSR is here to stay.  For more information on the TDSR, please see MAS's press release.

Send me a lifeline

Financial Crises Are Very Real
Singapore was almost unscathed by the global financial crisis of 2007-08.  It is useful to remind ourselves, once in a while, what happened then.  There are many good Youtube videos and documentaries to watch.
Just watch this one, if you want a quick-fix.



Who Is Going To Bail Us Out When A Financial Crisis Strikes? 

Remember, when the European countries like Ireland collapsed, they had a lifeline.  The European Central Bank (financed by the powerful Germans) bailed the Irish out to the tune of Euros 85bn.

Who is going to bail us out?