Government imposes new curbs on property buys through debt servicing framework

[cfa]

Not much effect at all, as usual just another wayang .

[hyom]

From June 29, a buyer's monthly housing repayments cannot exceed 60 per cent of his income.

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http://www.straitstimes.com/breaking-new...g-framewor

Shouldn't a prudent credit officer reject the loan application if the monthly interest payment exceed 60% of the applicant's income? Why need regulation to force this? I doubt this measure will have much effect on the property market and the stock market next Monday because it is common sense to expect our banks to already practise it.

[Nick]

I just want to clarify - does the debt servicing ratio of 60% include ALL debt (ie car loan, student loan, credit card, other properties etc) ? If so, then the 60% figure wouldn't seem to be entirely excessive ???

[kelvesy]

This comes after the seventh and most extensive round of tightening measures and include higher buyer stamp duty, rules on permanent residents (PRs) buying their first home and size restrictions on executive condominium (EC) units.

While I was working in the back office of HSBC, we derive client's annual income through sources such as tax assessment notice or client's CPF statements. From there, we used a conservative method which excluded their variable components of salary and bonuses/rental income TOTALLY. Unless they've been recurring almost every month, we don't add them in at all.

From that value, using MAS guidelines, we'll see how much credit he is allowed to borrow minus all existing debt obligations.

So my understanding is the policy is already in place before this announcement. Isn't 60% debt servicing ratio for a person rather high?

[CY09]

My initial reaction to the policy release: Are there a significant number of people out there who are servicing their repayments with 60% of their gross monthly income? Because if such MAS puts in place this policy, it means MAS has noticed enough no of ppl who are in this situation hence drafting the paper and submiting a policy discussion (this usually takes a few working days at least and civil servant's man-hours).

Also kelv, is it possible to shed light on what the bank's computation of the gross monthly income are? Thanks

[pianist]

60% is nowhere near prudence.....so much for this prudent announcement.

[Penguin Papa]

When I applied for my loans with several banks, all of them used 35-40% of my income to determine the amount that I can borrow. And they will include my other loans payment in the computation.

The announcement also set the interest rate that the bank need to use when calculating the max loan amount.

The way I read the announcement is that it simply fix the guidelines for the banks to adhere to. It should not affect the market much.

[kelvesy]

My initial reaction to the policy release: Are there a significant number of people out there who are servicing their repayments with 60% of their gross monthly income? Because if such MAS puts in place this policy, it means MAS has noticed enough no of ppl who are in this situation hence drafting the paper and submiting a policy discussion (this usually takes a few working days at least and civil servant's man-hours).

Also kelv, is it possible to shed light on what the bank's computation of the gross monthly income are? Thanks

To compute affordability

1) Compute the maximum cash instalment per month that you can afford. Banks generally require that this amount not exceed 40% of your gross income but this figure may vary across different lenders.

2) Computer the maximum amount of CPF funds you can use each month to service the loan. Take into account only sums paid into the Ordinary Account (check CPF website for the latest contribution rates; usually, 23%)

3) Add the 2 components (cash + CPF) to determine the maximum monthly instalment that you can afford

4) Calculate the maximum loan that you can obtain based on the monthly instalment derived. This should be based on prevailing interest rates and over the loan period that you desire and are eligible for. (where 3.5% interest comes in)

5) Compute the maximum affordable purchase price. Banks are allowed to finance up to 90% of purchase price or valuation, whichever is lower.

To verify client's income, notice of assessment, payslip or CPF contributions are needed.

Let's say for payslip, there's components like basic, variable, bonuses, allowances, travel allowances etc. We will just take the basic component as the gross income UNLESS the other components have been consistent for 3 months consecutively to be considered 'fixed'. Because we can't be sure that the variable component may fluctuate dramatically and it would be imprudent to include that in. However, clients working for govt sector, a 13th month bonus is always included. Now, if we include that in, we will need to include a 30% haircut to those components.

For notice of assessment, we will just take the annual salary figure from the income header. If the person is self-employed, we will request for CPF contributions to verify the figure is indeed real.

For CPF contributions, we just work backwards using the contributions rates that apply to the age of our client accordingly.

[opmi]

This comes after the seventh and most extensive round of tightening measures and include higher buyer stamp duty, rules on permanent residents (PRs) buying their first home and size restrictions on executive condominium (EC) units.

While I was working in the back office of HSBC, we derive client's annual income through sources such as tax assessment notice or client's CPF statements. From there, we used a conservative method which excluded their variable components of salary and bonuses/rental income TOTALLY. Unless they've been recurring almost every month, we don't add them in at all.

From that value, using MAS guidelines, we'll see how much credit he is allowed to borrow minus all existing debt obligations.

So my understanding is the policy is already in place before this announcement. Isn't 60% debt servicing ratio for a person rather high?

From my experience , HSBC is the most geow in credit underwriting. Other banks are more loose.

[cfa]

Ask one question , how many people really fall into this category ? Almost all know this announcement was as good as ' NIL '. for show only . At least they bother to wayang wayang , otherwise life will be very boring.