Borrowers in jobs at risk face tighter processing for new home loans

080620 - Tighthen New Home Loan

Home buyers are reportedly facing tighter credit assessment when they apply for mortgages – especially if they work in sectors that have been severely affected by Covid-19. 

Updated from : The Business Times6 August 2020

HOME buyers are reportedly facing tighter credit assessment when they apply for mortgages – especially if they work in sectors that have been severely affected by Covid-19.

On the other hand, for existing borrowers hoping to re-finance to cheaper home loans, banks are supportive and are easing the debt servicing criteria.

Those earning variable income in industries which have been badly hit by the pandemic such as in the food and beverage and hospitality businesses have seen a higher “haircut” applied to their incomes when applying for a home loan.

Banks say they are prudent in their credit assessment of home loan applicants while keeping within guidelines.

A DBS spokesperson said a home loan is a long-term commitment and in view of the impact of the global pandemic on the economy, “we’d advise new home loan borrowers to exercise further caution during this period.

“The bank continues to be prudent in underwriting mortgage loans, as one of the many ways of helping our customers better manage their home loan monthly repayments in the long run,” he said.

Alfred Chia, chief executive of financial advisory firm SingCapital, said: “Many banks are tightening their credit assessment specially for the ‘vulnerable sector/industry.”

It’s not that they cannot get a loan, just that the banks are more prudent, and will lower your loan eligibility,” said Mr Chia. SingCapital, which is majority owned by PropNex executive chairman Ismail Gafoor, has seen a big increase in clients with more complicated cases when approaching banks for home loans.

Mr Chia himself has seen a jump of 300 per cent of such tricky cases. SingCapital has about 50 staff who help clients with their financial planning and will upstream the more difficult cases to Mr Chia.

Joseph Wong, OCBC Bank head of consumer credit risk management said the bank has always evaluated applications for home loans on a case-by-case basis. “It’s important that we continue to access the ability of our home loan borrowers to service their loans,” said Mr Wong.

Even the boss of a small or medium-sized enterprise who draws a fixed monthly salary faces a higher “haircut” to his salary eligibility, said SingCapital’s Mr Chia.

In their credit assessment, banks typically do not recognise 100 per cent of the income of home loan applicants who are self employed, or earning variable income such as those whose monthly pay includes commission and bonuses.

In normal times the haircut means about 70 per cent of the monthly income is recognised, now it’s been reduced to 50 to 60 per cent, said Mr Chia. “Imagine if his staff has the same salary as the boss, the staff could conceivably obtain a higher home loan.”

Lim Beng Hua, United Overseas Bank head of secured loans, said that given the macro environment, the bank remains prudent when extending new lines of credit and providing refinancing to customers.

“We would also like to clarify that there is no change in UOB applying the TDSR (total debt servicing ratio) cap of 60 per cent… Instead, the bank has taken the prudent step of reviewing the variable income component in our assessment for property loan applications,” Mr Lim said.

The TDSR guideline of 60 per cent cap means borrowers’ monthly repayment for all debts – mortgages, credit card bills, car loans and personal loans – cannot exceed 60 per cent of their monthly income.

Edmond Wong, a former KPMG auditor who owns over 20 per cent of Eureka Snacks, has decided to upgrade to a new condo in District 23 costing S$1.3 million as it is nearer to his office. He is in the process of selling his current property which has been valued at S$830,000.

My salary has not changed, yet the bank “unexpectedly impose a higher haircut than usual,” said Mr Wong when he approached his bank for a bigger home loan.

Mr Chia, who is advising Mr Wong, said the latter has two options – adjust his budget or show funds – in order to bump up his loan eligibility.

Show funds refers to disclosing to the bank the amount of one’s savings, and or other investment holdings.

Mr Wong’s Eureka Snacks sells popcorn via omnichannels – consisting of five physical outlets, vending machines, through supermarkets and online. Two out of the five outlets are at Changi Airport. In the past four months, physical sales plunged by 80 per cent while online sales rose some 50 per cent, he said. Things are improving now with more people returning to shopping malls, he said.

Compared to new borrowers, existing mortgagors are in a better situation, as banks are supportive if they seek to re-finance their loans.

“Banks are helping people to lower their costs,” said Mr Chia.

Whether the property is owner occupied or for investment, he has seen cases where the bank is able to re-finance as much as 80-100 per cent, said Mr Chia. This is especially helpful for applicants who have suffered pay cuts.

Such adjustments would also help borrowers continue to meet TDSR limits. “It’s fantastic… as home owners get a better deal,” said Mr Chia.

At Standard Chartered Bank, its spokesperson said: “We adopt a balanced and prudent approach in our lending policies and ensure that they are in line with the regulatory framework and our internal risk policies.

“We have not made changes to the TDSR cap of 60 per cent. We will continue to monitor the conditions closely and ensure… the best decisions for our clients while adopting a prudent approach.”

Globally, interest rates have plunged as central banks pump liquidity into the financial system to help with the pandemic-induced recession.

The key 3-month Sibor (Singapore interbank offered rate) used to price home loans stood at 0.43817 per cent on Aug 5, down from 1.7745 per cent at the beginning of 2020.

Property consultants do not think more prudence on the part of banks will have a big impact on sentiment as home buyers are mostly a sensible lot.

“My gut feel is that not so many people will be affected,” said Christine Sun, OrangeTee & Tie head of research and consultancy. The current TDSR is already quite stringent, she said. Those who are affected by the pandemic with pay cuts or job losses are unlikely to increase their expenditure. “Don’t think they are a large group who are buying.”

“Right now those who are buying… are retirees, and regular working people; don’t think it will make the market plunge,” said Ms Sun.

“We’ve heard that some of the foreigners who are buying are not even taking loans,” she said.

There was a significant spike in new condos bought by foreigners in June this year, jumping 139 per cent from May to 170 units and 42.9 per cent from a year ago. Including resales and sub-sales, 250 non-landed homes were bought by foreigners in June 2020, similar to the 250 units inked in June 2019.