debtWhy blame the government where you are not prudent in the first place?

Finally, the rules, which take effect today, demand that lenders consider a borrower’s total debt obligations, including other mortgages and loans for cars, before granting a new home loan.

Banks will not be able to approve a loan if the monthly repayments of a buyer’s total debt obligations exceed 60 per cent of his gross monthly income.

Take a property buyer who has a monthly income of $10,000 and debt obligations, including his car, credit card and other such loans, of $3,000.

If the new mortgage’s monthly repayment exceeds $3,000, that would bring his total repayments to over $6,000 – and total debt obligations to over 60 per cent.

Summary of New Framework

Total Debt Servicing Ratio (TDSR) framework to be used

  • Consider monthly repayments of new loan and all other debt.
  • Calculate new loan repayments using medium-term interest rate (3.5per cent for home loans) or prevailing interest rate, whichever is higher.
  • Discount variable income and bonuses by at least 30 per cent.
  • Discount financial assets if used in calculating income.

Loan-to-valuation rule changes

  • Borrower of loan must be mortgagor of the home.
  • If borrower fails to meet TDSR threshold, his guarantor to be included as co-borrower.
  • Use income-weighted average age of joint borrowers in deciding loan tenure. For instance, if the father has a higher income than his son, it may mean an older average age and shorter loan tenure.
About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

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