How does MAS's New Debt Servicing Framework Affect You?

MAS's new debt servicing framework essentially stipulates the minimum standards of how financial institutions calculate the Total Debt Servicing Ratio (TDSR) and plugs loopholes that existed previously. Here's a summary of the key details.

• TDSR to be computed based on an interest rate of 3.5%.
  • Previously, the rate that each financial institution used can be quite different. For example, Bank of China used their prevailing housing loan rate, which is below 1.5% for the longest time, while a couple of banks based their TDSR computation on interest rates of more than 4%.
   
• TDSR to be computed based on the income-weighted average age of the borrowers.
  • Most banks used to take the average age of borrowers without factoring in any income difference between the borrowers. Others, like OCBC, simply compute the TDSR based on the younger borrower's age.
   
• A haircut of at least 30% to be applied to all variable income (e.g. commissions, bonuses) and rental income.
  • All financial institutions did not apply any haircut on bonuses while the majority apply a 30% haircut on commissions and rental income.
   
• TDSR threshold should not exceed 60%.
  • Most financial institutions' TDSR threshold is 50%. A couple of banks allowed a TDSR threshold of 60% if borrowers met certain criteria.
   
• Borrowers must now be be mortgagors
  • Unlike HDB housing loans, private property loans did not use to have this restriction.
   
• Guarantors for borrowers who do not meet the TDSR threshold must now be brought in as co-borrowers
  • The housing loan that a guarantor is supporting does not contribute towards his or her housing loan quota (2^nd property loan financing is currently at a loan-to-value of 50% or lower).

How does this MAS framework affect the man in the street?

• For single borrowers or joint borrowers around the same age, they can now borrow slightly less than they could have, assuming these folks know where to look previously. Those who do not know or care to find the bank offering the highest loan may actually obtain a marginally higher housing loan than before.

The new framework impacts the following groups of borrowers most.

• Joint borrowers where a big age gap exists between the borrowers, and the older borrower is earning significantly more than the younger borrower (e.g. father and son)
• Self-employed
• Commission earners like insurance and real estate agents
• Employees where around 35% or more of their annual pay is derived from bonuses