New rules on mortgage lending hit variable income earners

New mortgage lending rules restrict those reliant on commission, bonus

THE new rules on mortgage lending could leave good earners like remisier Alan Goh out in the cold if they try to take on a bigger home loan.

Mr Goh relies entirely on commissions for his monthly income and, although he earns a comfortable living from stock market trading, he will face tighter restrictions on lending.

The new rules imposed by the Monetary Authority of Singapore (MAS) last Friday require banks to apply a 30 per cent discount to the annual variable income that borrowers earn. This includes bonuses, allowances, rents from investment properties - and commissions, which means Mr Goh is caught in the net.

A new total debt servicing ratio (TDSR) framework also states a borrower's monthly repayments on all loans, including any new mortgage, cannot exceed 60 per cent of his gross monthly income.

"(The new rules) mean I wouldn't be able to afford a bigger property like I would have been able to before, because it would require a bigger loan. It will be a lot harder for people like me to switch now," said Mr Goh, who bought a five-room Housing Board flat last December.

Property agent Max Wong is in similar straits, noting that he is now further from his goal of buying his first investment property.

"I am definitely concerned because less of my income will be considered by the banks. I'll just have to save up much more to buy my second property," he added.

Commission-earners like Mr Goh are just one of a number of groups of people likely to be hit by the new curbs, which were imposed to stop borrowers taking on too much debt, especially with interest rate rises on the horizon.

Bank officers told The Straits Times that property agents, insurance agents and the self-employed are all variable income earners and so would be hardest hit by the new regulations.

Borrowers relying on rental income to finance more property purchases will also find it tough.

The common element is that these people do not have the security of a monthly payslip from an employer proving that they are gainfully employed. Instead, these borrowers will have to furnish documents such as their Income Tax Notice of Assessment going back two years or tenancy agreements to the banks - and then have the 30 per cent discount applied.

That can, in a click of a mouse, turn a healthy annual income of $100,000 into a less-impressive $70,000.

The new rules could also affect a group not normally associated with having difficulty borrowing - high-earning executives in listed firms. Variable income like bonuses could comprise as much as 80 per cent of a top executive's pay, as annual reports show.

A discount of 30 per cent on such income could amount to a substantial sum, and so substantially reduce the size of a loan.

Banks said variable income earners can make up a reasonable proportion of their borrowers.

Ms Phang Lah Hwa, OCBC Bank's head of consumer secured lending, said about 30 per cent of its home loan borrowers are on variable income.

The Straits Times understands from sources that variable income earners make up about 5 per cent of United Overseas Bank's home loan borrowers.

Both banks said that they were already applying a discount of 30 per cent to variable income before the new TDSR framework.

Buyers of Housing Board flats have less risk of being hit by the rules, says a Knight Frank report.

Research head Alice Tan noted that HDB buyers already face tough restrictions that were implemented in cooling measures in January. "HDB buyers have to meet a mortgage servicing ratio of 35 per cent for HDB loans and 30 per cent for private loans."

The ratio refers to the proportion repayments take up of the borrower's gross monthly income.

Public housing buyers are also likely to have only one mortgage as they cannot own more than one property and so are less likely to bust the 60 per cent limit in the new TDSR framework, she added.

A step towards more financial prudence