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?

London Property Bank Loans - SGD $ or GBP £?

SGD or GBP Loan for a London Property?

Interesting question. When we first entered the London property market, the active lenders to Singaporean buyers were Lloyds TSB and RBS (Royal Bank of Scotland). There was no option of taking an SGD loan then.Both Lloyds and RBS banks have now stopped lending to buyers based in Asia, based on what we know.

Interest Rate and Arrangement Fee for UK Loans
The interest rate is a floating one that is pegged at a margin above the Bank of England’s base rate. Historically, the BOE base rate looks rather scary, but thankfully, the base rate of 0.5% has held since March 2009. It is also common that UK banks charge an arrangement fee upfront for the loan. We had to pay an arrangement fee of 1%. (ouch)

Singapore Banks
If your property is mortgaged, the interest rate has a significant bearing on the yield and investment proposition. From 2009, Singapore banks started to offer financing for London property, with the option of GBP or SGD loans. SGD loans tend to be pegged at a margin above SIBOR, whereas GBP loans by Singapore banks will be pegged at a margin above the cost of funds. Generally speaking, the interest on an SGD loan will work out to be 1-2% cheaper, and Singapore banks do not charge loan arrangement fees upfront. Our subsequent loans have all been SGD loans with Singapore banks.

How much can you borrow? 
At time of writing, it is 70% for properties that the bank would be willing to lend you on. You must be aware that different local banks have different practices.  Some only lend to Zone 1 & 2 properties.  Some will lend on properties further out, but at reduced LTV, say 60% or even 50%.  The policy will also change, as the market moves.  Therefore, make sure you check with your banker before committing to any purchase.

Getting Loan Approval Before Exchange of Contracts
We prefer to secure our loan approvals before we commit to the purchase, i.e. before we exchange contracts with the Developer.  In the UK, exchanging contracts is akin to signing the S&P agreement in Singapore.  You are now committed to complete the property purchase.  Exchange of contracts usually requires a 10% down-payment.

By securing the loan approval, we are assured that the bank has now committed to lend us the 70%, subject to valuation nearing completion.  Note that if you pull out after signing the contract with the bank, you will have to pay a fee, usually 1.5% or even 2% of the approved loan quantum.

Top Up During Completion
Exchange rate fluctuations will have an impact on foreign property investments. If you are taking an SGD loan, the approved loan quantum is denominated in Singapore dollars. You must be prepared to top up if the GBP strengthens between the time of the approval and completion date.  We got affected by this recently.

Example:
70% loan on a £500,000 property is £350,000.

At the point of the bank’s approval for the loan, if the exchange rate is SGD2.00 = £1.00, the approved loan quantum works out to SGD $700,000.

At completion, if exchange rate moves to SGD2.10 = £1.00, the approved loan quantum will only buy £333,333. You will have to ensure that you have sufficient monies for completion.  In this case, you have to top up £17,000 for completion.  (That is quite a lot of cash)

While your rental income will be paid in £, your monthly loan repayments to a Singapore bank will be made from a Singapore bank account. Before you decide on financing arrangements, do consider, amongst others, the bank’s terms and conditions, the charges you are expected to bear, the repayment modes, the lock in period and clauses relating to redemption.

Lock In Period
For example, if you are planning to flip or sell a property immediately upon completion, you may want to negotiate against a lock-in period. Do bear in mind that financing from Singapore banks are now subject to the TDSR rules, and the rental income from UK properties may not be factored in the income stream. Also, whether to take a £ or SGD loan will depend on your outlook on the currency market, and how you choose to hedge. Singaporean buyers who had their SGD loans disbursed last year have made a paper gain from the exchange rate alone.

Valuation Cost
Regardless which bank you go for, as a borrower, you will be have to bear the cost of the valuation survey. The cost depends on the valuation company that the bank engages; it also varies according to the purchase price of the property. So far, our purchases have been bite sized and the valuation costs we have incurred range from between £350 – £550.

During the financial crises of 2009, it was not uncommon that valuation prices did not match up to the purchase prices. Borrowers had to top up the difference. However, the London property market has moved since then, and we have not encountered any valuations which came in below our purchase price; Singapore banks have related the same. In fact, the most recent valuations for us have turned in figures that are higher.

However, do note that the property prices in London have shot up tremendously in the past 6 months.  We cannot tell whether valuations have kept up with the prices.  This is one area of risk you have to bear with off-plan properties because the valuation of the property is only done close to completion while you are committing years in advance to the purchase.

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(page updated 29 March 2014)

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