Local banks' debt ratio likely within limits

SINGAPORE - Local banks were likely within new limits for home loan debt criteria before the Monetary Authority of Singapore (MAS) announced new curbs on property loans last Friday.

The Straits Times understands from banking sources that local banks had been using a debt servicing ratio of about 50 per cent. That meant loan repayments could not exceed half of a borrower's monthly income.

Sources said DBS Bank's was around 50 per cent, United Overseas Bank's (UOB) between 50 and 60 per cent, while OCBC said its ratio for home loans was around 30 per cent, and 60 per cent when other debts were considered.

These proportions do not sound far off from the new MAS figure threshold, but there were probably differences among the lending practices of banks and finance companies.

The central bank noted in a recent review of mortgage lenders that some were only looking at the loan being applied for when computing a debt servicing ratio, ignoring a borrower's other debts. That, in turn, could give a misleading impression of a person's ability to keep his head above water.

The new rules now state that total debt repayments - this includes the mortgage repayment plus any car, student, or similar personal loans and other mortgages - cannot be higher than 60 per cent of gross monthly income.

MAS said the new framework - called the total debt servicing ratio, or TDSR - was calibrated to "help standardise and strengthen financial institutions' credit underwriting practices" as practices used to approve property loans "varied widely across financial institutions".

It also moved to tighten up the way a borrower's variable income - commissions, bonuses and allowances - and any rent from investment property is assessed, given that such income can vary from one year to the next.

Banks may have previously included the full amount of this when computing monthly income, but now they will have to apply a discount of at least 30 per cent to this type of income when assessing a person's eligibility. A person who earned say $24,000 last year in variable income will now have that assessed at only $16,800 when annual income is calculated in a loan application.

Banks seem to be taking the new rules in their stride. A UOB spokesman told The Straits Times: "While we were already closely aligned with the new regulations, adjustments have been made to ensure full compliance."

OCBC head of group communications Koh Ching Ching said the bank is in compliance and has aligned ratios with the measures. DBS Bank added that "key considerations for approving a mortgage include an assessment of the customer's existing financial commitments as well as their ability to make repayments".

CIMB analysts have pointed out that banks have generally kept to a debt servicing ratio limit of 30 per cent to 40 per cent per loan, which will cushion them against the latest move.

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