Post the announcement by MAS on the TDSR framework, there were some confusion and dilemma faced by property buyers. If you intend on pledging of assets to obtain a property loan, please read on how it is being implemented. (Help yourself by using our free Singapore home loan calculator and compare rates from over twenty banks!)
Asset Types For Pledging
MAS categorizes the assets to 2 types (liquid and other). Liquid assets refers to Singapore dollar note and coins and those deposited in bank accounts. Other assets include collective investment schemes, business trusts, stocks, foreign currency deposits and gold.
Haircut on Asset Types
Haircut in this case refers to a discount in the value of the assets. It ranges from 0%-70% depending on the pledging tenure. For instance, your liquid assets (i.e. cash) are recognized at 100% of its value with 0% haircut if you pledge it to the bank for at least 4 years. Of course, the bank has to be the one that is also financing the property. On the other hand, if you pledge for less than 4 years or unpledged, a hefty discount of 70% is applied.
How Does Asset Pledging Helps
Are you affected by TDSR framework? You would be considering pledging as an option if your income is insufficient to meet the TDSR threshold of 60%. In this case, your assets serve to augment your income. Let’s say you intend to pledge cash of $200,000 Singapore dollars for 4 years. No haircut is applied so its full value is recognized. It will then be amortized over 4 years (48 months), which is about $4,167 a month. This amount is used as your new ‘income’ in addition to your income. So now you have a bigger monthly income which hopefully will meet the TDSR criteria.
Does Every Bank Accept Asset Pledging?
Before you start jumping to apply with any bank, please note that NOT every bank accept asset pledging. We have spoken to our bank partners and surprisingly, some prefer the classic way of property financing with down payments and income. This approach is still in line with MAS guidelines as not doing so is actually more conservative. Another consideration is the timing to show and pledge your assets. Almost all banks will want you to show the assets at the point of application. This will cause some discomfort with folks who are selling and using the sales proceeds to pledge and purchase the next property. Unless you can produce separate assets, application of a loan might not be accepted since the sales proceeds are not with you yet. This applies to in-principle approval too. Pledging will take place during the acceptance of the loan.
For other good reads, the impact caused by TDSR on self-employed could be handy.
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