A blog reader shared with me that he had put down a deposit to buy a property for investment. When he applied for a housing loan, to his big surprise, the bank told him that he couldn’t pass the TDSR (Total Debt Servicing Ratio) test.
“I thought I was financially sound. How could I possibly fail the stress test?”
Another reader was checking with the bank to refinance his existing mortgage when the 3-month Sibor went up sharply in the middle of November. He had the same fate when he was informed of his failure to meet the 60 percent TDSR threshold.
“When I applied for my housing loan four years ago, it was a breeze to get the bank approval. So imagine the shock I got when they couldn’t help me to refinance.”
To get the answers straight from a mortgage expert, I talked to Wayne Quek, Director of mortgage consultancy firm Home Loan Whiz and founder of online financial comparison site Easyrates.sg, who sees applicants fail the TDSR test almost every day!
According to Wayne, you can fail the TDSR test in five ways:
1. You have bad credit.
The main reason why loan applicants are rejected is due to bad credit.
You know what it means. You have that bad habit of not paying your credit card bills on time. You tend to default on your payments.
It is payback time now when you go to the bank to ask for a housing loan.
Solution: Start with a clean slate today and clean up your act. Banks usually need one year of clean repayment history to consider lending you money again.
2. You have a legal problem.
Banks can’t approve your mortgage application if you have litigation issues. Ask yourself whether you have recently run into legal troubles or there is any pending lawsuit against you.
Similarly, your application will definitely be thrown out if you are still an undischarged bankrupt.
Solution: Wait till the dust has settled and apply again. Discharged bankrupts will have to wait for 5 years before most banks are willing to consider approving their loans.
3. You have too much liability or too little income.
The TDSR framework is calculated as a ratio of how much monthly liability you are paying over how much income you are earning. If you are a middle-aged white-collar worker with a sizable car loan and personal loan, you can fail your TDSR test because you have too much liability.
Another common problem is providing banks with credit card statements. If you are unable to provide the bank with your latest credit card statement, they will add a huge chunk of your credit limit into the TDSR calculation.
You are likely to fail TDSR too if you belong to the lower income family category and need a loan to buy a HDB or EC flat. Take note that the MSR (Mortgage Service Ratio) is twice as stringent as TDSR which makes it even more difficult for you to obtain the desired loan quantum.
Solution: The short loan tenure of car loans and personal loans means high monthly repayments. Lower your liability by paying your outstanding car loan and personal loan as much as you can or you will have to settle with a lower loan quantum. You can also increase the home loan amount by pledging your liquid assets such as bank deposits or stocks.
4. You are self-employed or in-between jobs.
It is hard for the self-employed to pass TDSR, especially those who are at the stage of starting their own business. Banks access TDSR only based on your latest IRAS Notice of Assessment. For instance, if you set up your company in January 2017, your first tax assessment will only arrive in May 2018. You will fail TDSR in between because banks cannot recognise any income you made.
Some business owners tend to declare very low income to maximize their tax savings which affects the results of their TDSR test.
If you are in between jobs, or on sabbatical with no income, you are also likely to fail the TDSR test.
Solution : Consider buying or refinancing your property before you leave a job. Similarly, buy or refinance your property before you venture out on your own. Always declare all the income generated from your business and pay the corresponding taxes.
5. You are a first-time or multiple-property investor.
If you are a first-time investor with an existing mortgage buying a second property, you are only looking at a maximum of 50 percent loan-to-value. Also, your existing housing loan instalments will be added to liabilities in the TDSR calculation.
If you own multiple properties, banks recognize your rental income by only 70 percent of it (after 30 percent haircut). You will also need to show at least 6 months remaining lease in the tenancy agreement.
Solution: For first-time investors, consider decoupling if your current property is owned by more than one person. This will free you from liability of your existing mortgage, avoid payment of Additional Buyer Stamp Duty and you will be able to borrow 80 percent loan-to-value for the investment property. For multiple-property investors, declare other forms of liquid assets and pledge them with the banks to increase your income. Renew the tenancy agreement with your tenants well in advance before it expires.
Other useful tips to pass the TDSR test
Mortgage expert Wayne Quek is generous enough to reveal some little-known tips to help us tackle the TDSR restrictions.
1. Although existing home owners are exempted from TDSR when refinancing from September 1, it doesn’t help to increase your chances of getting approval. Most banks still have their internal guidelines which mirrors the MAS TDSR closely. Finding a good banker makes all the difference. His/her ability to put up the case to internal credit can result in a much higher chance of approval.
2. Paying off your personal loan and car loan can help to increase the amount of your housing loan significantly. Avoid spending on multiple credit cards as this will also affect your TDSR. Speak to a mortgage consultant or a banker to get some advice.
3. Even if you fail the TDSR test, your loan can still be approved. You just settle for a loan amount lower than what you ask for. Consider pledging or showing assets to the bank to increase the loan amount.
4. You will fail the TDSR test again if you apply to multiple banks without knowing your issue. A good mortgage consultant can help you to assess your situation and work out a strategy for you to get the loan approved.