By Leong Sze Hian
What is it about the Total Debt Servicing Ratio that most people don’t know and that you really need to know? The new Total Debt Servicing Ratio (TDSR) guidelines may appear to penalise existing property owners and arguably (at least from the perspective of the borrower), for no apparent good reason or justification.
Cannot refinance?
TDSR applies to existing residential and commercial property loans as well, when it comes to refinancing or repricing. In the past, owners refinance with another bank or reprice their loan with the same bank to avail themselves of better loan rates with no increase in debt levels. Failure to refinance or reprice will mean that borrowers may be hit by the prevailing banks’ board rates or a percentage above prime rates which may be as high as 5%.
At the mercy of the lender?
As there will be cases whereby borrowers will be caught by the TDSR, they may be hit by higher interest rates if they are unable to refinance or reprice. Instead of helping them (which is the purpose of the TDSR – to discourage non-prudent borrowing), they may in a sense be at the mercy of the lenders.
Emergency funds?
All unused credit lines and credit cards’ credit limits will also be included in the calculation of the TDSR.
So, such credit lines which may normally be kept as an emergency fund in the event of business or personal cash-flow problems, prolonged unemployment or large reduction in salary, illness or accident, etc, may no longer be available. This may cause undue financial stress to those affected.
Terminate credit lines and then reapply?
So, if you are hit by the TDSR when you want to refinance or reprice your housing loan or commercial loan – what can you do?
Try to pay off your outstanding credit lines or credit cards’ balances and cancel your credit cards, so as to not go beyond the TDSR – then, reapply for your credit lines and credit cards again?
To put this in a real life example, let’s say you have a 25 year housing loan for $1 million at an interest rate of 1.5% for the first 3 years of the loan. The monthly mortgage instalment is $3,999. If you fail the TDSR when you try to re-finance your loan after 3 years – your bank board rate housing loan may increase to say 5 per cent – your monthly instalment goes up to $5,620. You do not have a choice!