MAS introduces debt servicing framework for property loans

To encourage financial prudence and cool demand.

The Monetary Authority of Singapore (MAS) announced that it will introduce a Total Debt Servicing Ratio (TDSR) framework for all property loans granted by financial institutions (FIs) to individuals. This will require FIs to take into consideration borrowers’ other outstanding debt obligations when granting property loans. They will help strengthen credit underwriting practices by FIs and encourage financial prudence among borrowers.

MAS will also refine rules related to the application of the existing Loan-toValue (LTV) limits on housing loans. These refinements seek to ensure the effectiveness of the LTV limits that were put in place to cool investment demand in the housing market. In particular, they aim to prevent circumvention of the tighter LTV limits on second and subsequent housing loans.

MAS conducted a thematic inspection of banks’ residential property loan portfolios in 2012, which found that while banks generally had in place sound policies to assess the credit worthiness of borrowers, there were still uneven practices with respect to the application of debt servicing ratios and areas for improvement in credit underwriting practices.

MAS said the new TDSR framework will provide FIs a robust basis for assessing the debt servicing ability of borrowers applying for property loans, taking into consideration their other outstanding debt obligations. FIs will be required to compute the TDSR, or the percentage of total monthly debt obligations to gross monthly income, on a consistent basis.

The coverage of the TDSR framework will be more comprehensive than FIs’ current practice. The TDSR will apply to loans for the purchase of all types of property, loans secured on property, and the re-financing of all such loans.

The methodology for computing the TDSR has also been standardised. FIs will be required to, for example, take into account the monthly repayment for the property loan that the borrower is applying for plus the monthly repayments on all other outstanding property and non-property debt obligations of the borrower, among other considerations.

FIs will be required to verify and obtain relevant documentation on a borrower’s debt obligations and income used in the computation of the TDSR.

MAS expects any property loan extended by the FI to not exceed a TDSR threshold of 60% and will regard any property loan in excess of a 60% TDSR to
be imprudent.

The threshold is set at 60% for a start to allow both the FIs and borrowers to familiarise themselves with the TDSR framework and its computation methodology. MAS will monitor and review the 60% threshold over time, with a view to further encouraging financial prudence.

The new rules will take effect from 29 June 2013.