Fine-Tuning Total Debt Servicing Ratio For Home Owners to Enjoy Zero-Interest-Rate-Policy to The Fullest

fine tuning TSDR 2016 09 01

The Monetary Authority of Singapore (MAS) has just announced today that, with immediate effect, owner-occupied residential property owners can now refinance their mortgage without the ceiling of Total Debt Servicing Ratio (TSDR).

As for non-owner-occupied properties, owners can enjoy this exemption only when the following two conditions are met:

  1. Commits to a debt plan with his financial institution to repay at least 3 percent of the outstanding balance over a period of not more than three years; and
  2. Fulfils his financial institutions’ credit assessment

How can I benefit from this change?

Nobody knows how long will the current Zero-Interest-Rate-Policy (ZIRP) last till, so while it is still low, isn’t it the best time to quickly clear your mortgage and fully redeem your property?

Let’s say you are comfortable to service your mortgage at 90% of your monthly income, here is how much time and money you could save if you were to refinance your loan tomorrow.

Assuming:

  • Monthly income – $5,000
  • Property value – $811,645
  • Interest rate – 2.0%
  • Max loan repayment (with TDSR) – $3,000
  • Loan repayment @ 90% (without TDSR) – $4,500

Using a simplistic example, with constant monthly repayment and ceteris paribus, you will cut short your loan by 12 years and avoided paying over $115,000 of interest.

interest avoided for refinancing to shorter tenure.JPG

How will this change impact the property market?

In the short run, there is technically no impact to the property market because this change is targeting at existing owners only.

There is no change in TSDR restriction for new property purchase. You can still only loan up to the ceiling of 60%.

However, in the long run, when more properties are redeemed earlier, owners will be able to buy the next property earlier with the interests cost avoided to pay additional buyer’s stamp duty which is likely to stay for awhile more.

Furthermore, down payment will be low as they would be able to take 80% loan with a debt-free status (instead of 50% loan when they are still serving an existing loan).

 

All in all, this is a good start from the government to calibrate the market with a long-term perspective allowing property owners the flexibility to service their mortgage at a higher debt ratio in order to take advantage of the current ZIRP.

 

 

 

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