The considerations for loan approvals are often limited to the regulations that you are already aware of, like fulfilling the debt servicing ratio. However, you may not always be able to borrow at your desired loan-to-value (LTV) ratio, putting a greater obstacle in the way of achieving your dream property.
As prospective homeowners, how can you strive towards achieving higher loan approval rates?
Let us first recap some factors that would affect the approval of a mortgage application.
Age is a large factor in the loan application. More specifically, having longer income-earning years to support the debt servicing is viewed as a reduction in risk for the bank. For the borrower, this makes sense – surely you would not want to spend your lifetime repaying debts. Therefore, having an arbitrage cut off works well here.
However, this is also contingent on the next factor; the level and type of income earned.
Having a steady recurring income provides the assurance that you have the ability to service the loan and will not pose as a credit risk to the bank. As a borrower, you certainly would not want to spend your entire income on monthly payments either. While certain jobs pose a greater risk due to uneven cash flows, there are certain lines of work that can be advantageous in your endeavour of searching for the right financing for your property.
So, what other factors come into play?
Today, we will reveal the 7 secret bank policies.
1. Income Waiver
Currently, one of the prerequisites for purchasing a property is ensuring that we fall below the Total Debt-Servicing Ratio (TDSR) ceiling of 60%. As the name implies, the TDSR refers to monthly repayments on all outstanding loan obligations as a percentage of monthly income. Your TDSR must be able to withstand a “stress test”. This is a test of whether you remain within the TDSR ratio of 60% in a scenario where interest rates range between 3.5% – 4.5%, depending on prevailing rates and type of property.
You could have saved up for your retirement, purchased a property and finally wish to retire. At this point, you may be wondering whether if you will be penalised since you do not have an income for TDSR assessment.
Well, if this property is for your own stay, you will have little to worry about. Banks do not usually penalise you because of your decision to retire after taking on a loan. After all, you have fulfilled the requirements of the loan before retiring. Banks are humanistic in Singapore.
On the other hand, if it is an investment property: even if you have no income, most banks allow you to repackage your loan with a down payment of 3% on outstanding loan balance.
The conditions required to satisfy this often involve not having any late payments and a clean credit history. Furthermore, refinancing in this case is restricted to achieving a better interest rate and a more favourable tenure. You certainly would not trust your friend with more money if he failed to pay you back the first time, would you?
2. 24 Month Repayment Period
While you may be able to refinance a property even without income, the limitation remains that adjustments are only permitted to interest rates and the loan tenure. However, a situation may arise where you may wish to have an equity / 5th charge / term / cash-out loan. This usually occurs in the case where the market value of the property has appreciated.
Considering you have a clean and healthy credit history, you can show the bank that you have cash funds available to pay for 24 monthly instalments. This increases your chances of obtaining a meaningful loan amount.
The funds can then be used to pay off higher interest loans such as car loans or personal loans.
You could also use an equity loan for your business and investment purposes.
3. Show = Pledge
Similar to the previous scenario, you could alternatively have pledged cash as a lien to support your loan application. However, you must also note that assets pledged for a minimum of 4 years are taken at 100% of its value.
The next alternative for a bank is to accept evidentiary proof of funds, if so, a haircut of 70% of its value will be applied. Some banks, however, take show funds as pledge amount without any haircut. These really helps to improve your cashflow and liquidity.
While these workarounds can be convenient, if you are not currently earning an income, it is important to note that having a healthy credit history and proper financial planning on your part is required.
4. Max Tenure
Today, the limitations of the Loan-to-Value (LTV) and TDSR weigh heavily in favour if you have either time or sufficient funds. On one hand, you can take a 75% LTV loan on a property but repay it before 65 years of age. On the other hand, you could take a 55% LTV loan and stretch that out to repay before 75 years of age.
While it is definitely not your goal to spend your life indebted, this could be a useful tool to guide your decision to take a loan on a property. Stretching out the loan tenure does have its benefits.
For instance, if you are choosing to purchase your property and sell it to reap capital gains, it would be wise to adopt a longer loan tenure to reduce your monthly loan repayments. During which, you may fall below the TDSR of 60%, allowing you to continue taking loans within your capacity.
Eventually, when you do sell the property, you will be able to reap magnified benefits from leveraging. Until then, lower loan repayments would have kept your cash outflow at a minimum, thereby maximising your overall return on the property. With good planning, you would have managed to reap greater returns and have fully repaid your loans.
Most banks tend to recognise base pay as income and at 100% recognition, while other banks may take allowances into consideration. Effectively, this raises your monthly income, and hence your ability to service the loan while remaining under the 60% TDSR.
For certain jobs, allowances constitute a reasonable portion of overall income. This will be beneficial if you are a public servant, shift worker or an individual who have risk allowances.
However, do keep in mind that in most cases, you will need 3 consecutive months of pay including these allowances and must be verified before being taken into consideration.
6. Credit History
You could be familiar with credit score as a metric to measure your likelihood of repaying loans on time. However, each bank uses a different internal metric and privy only to certain departments/staff. It is important to note that certain events can flag some risks on in the banks’ systems and would best be avoided if possible, such as restructured debt or bankruptcy.
Prompt payments, low commitments and non-excessive applications of credit facilities are a sign of good credit.
PSA: Debt and commitments should always be within your means.
With greater access to online resources and audience, the pandemic has shown that for some, the sky is really the limit. If you decide to strike out on your own, do bear in mind that being your own boss comes with inherent risks. For a great portion of self-employed individuals, income is cyclical and is hard to predict on a month-to-month basis.
Banks view this the same way.
In order to smoothen out the irregularities, a haircut of 30% could be applied to your monthly income. And for some banks, it could be up to 50%.
This means that 50% of your income will be used for the basis of loan assessment, and further applied to the 60% TDSR.
For example, if you are a self-employed and have an annual income of $100,000.
After applying the 30% haircut, it becomes $70,000 p.a.
After factoring the 60% TDSR, it becomes $42,000 p.a.
Also, you would usually have to be in the same role for 2 years for your self-employed income to be recognised.
Some of these factors may appear limiting, but they all serve the fundamental goal of ensuring that you are capable of repaying your mortgage. Understanding these nuances are important to ensure that your immediate satisfaction of obtaining a loan does not sprout trouble many years down the road.
Before you jump ahead to process your loan application, please note that this article is meant to inform and educate only. It is especially important to do your own research based on your own personal circumstances before making any decisions.
After all, the past 2 years have shown how unpredictable the economy can be. Redbrick Mortgage Advisory strongly encourage you to chat with our professional and independent mortgage advisors on how to optimise your loans and achieve your property goals.