Whether you are a first-time buyer or a seasoned property investor, the initial cash outlay is always one of the foremost concerns when purchasing a property in the world’s second most expensive city, Singapore. As such, many people are probably thinking of ways to minimise the downpayment of a dream home, such as taking up a bigger mortgage, as property prices can be extremely high.
This is especially true in scenarios where one fails to meet the Total Debt Servicing Ratio (TDSR) and is looking at alternative ways to increase their borrowing capacity. In such cases, pledging an asset can be a handy option to augment your income and increase your borrowings, bringing them a step closer to their dream home.
But even when pledging assets, there are different ways to go about this too. In this article, we will learn more about the role of asset pledging in home loans, with a focus on unpledged assets.
The Role of Asset Pledging in Home Loans
Essentially, the main point of pledging an asset is to boost your borrowing capacity so that you can minimise the upfront downpayment by borrowing a larger amount to finance your dream property. There are four kinds of assets that you can pledge to qualify for home loans:
| Classification of assets | Example |
| Eligible financial assets | Cash deposits, bonds, unit trusts, listed company shares |
| Liquid assets | Un-encumbered funds to draw on at any time |
| Pledged assets | Cash deposited in a fixed deposit with the mortgage lender for 48 months (from the start of the loan) |
| Unpledged assets | Cash deposits that do not have to be placed with the mortgage lender for 48 months |
Particularly after the latest property cooling measures were announced in September 2021, and with the TDSR and Mortgage Servicing Ratio (MSR) interest rate floor calculation by 0.5%, you may find yourself experiencing some difficulties when trying to meet the TDSR criteria.
You may calculate your TDSR based on the formula below:
TDSR = (Total monthly debt obligations* / gross monthly income**) x 100%
*Monthly debt obligations to be included:
- Property-related loans (including the loan being applied for)
- Car loans
- Student loans
- Renovation loans
- Credit card loans
- Any other secured or unsecured loans (including revolving loans)
**Before tax and excluding any CPF contributions made by the employer.
Some find that their income may not be sufficient to take up a loan at times. However, with assets such as liquid cash, stocks, and equities on hand, you would be able to present these assets to the bank to obtain a higher loan amount.
In this case, asset pledging is beneficial as they are computed as a source of ‘additional’ income for you to meet the 55% TDSR criteria.
Haircut on Asset Types
A haircut refers to a ‘discount’ in the value of your assets and can range from 0% to 70%, depending on the tenure of your pledging. For example, if you pledge your liquid assets with the bank for a minimum of four years, it is recognised at 100% of its value with no haircut, provided the bank is financing your property.
On the other hand, if you pledge your assets for less than four years or opt for unpledged assets, you will incur a hefty 70% haircut on your asset value! The following table summarises the types of eligible assets and their respective haircuts:
Liquid assets (e.g. Singapore dollars and coins, including deposits)
Minimum 0% haircut
Minimum 70% haircut
Other financial assets (i.e. Foreign currency notes and coins, including deposits, Collective investment schemes, Business trusts, Debentures, Stocks, Structured deposits, Gold)
Minimum 30% haircut
Minimum 70% haircut
However, do keep in mind that not all banks accept asset pledging, with some preferring conventional downpayment and income. So, remember to check with your bank to avoid any late surprises!
The Case for Unpledged Assets in Qualifying for Home Loans
At first glance, unpledged assets may seem more advantageous than pledged assets, given the flexibility of cash flow without locking in your deposits for 48 months. This may be an option if you have plans to use the funds in the near future and cannot commit for the duration.
Individuals can explore the option of unpledged assets if they have available cash in hand. This flexibility will afford you more room to plan for your other financial commitments and obligations.
However, the trade-off for this financial flexibility is that unpledged assets will only constitute up to 30% of ‘additional’ income compared to pledged assets, meaning that your monthly gross income will see a meagre growth compared to pledging it with your lender.
Additionally, while unpledged assets do not require a lock-in of funds, banks would generally require to see the funds twice: during the loan application, and before loan disbursement.
Let us look at the formulas for converting pledged and unpledged assets to income.
Pledged assets:
Monthly gross income derived from asset = Asset Value / 48
Hence, if you decide to pledge $20,000 in assets with a bank for four years, no haircut is applied, so its full value will be recognised when computing your income, which translates to an additional $416 per month, that can be used to meet the 55% TDSR criteria.
For unpledged assets, the formula is as follows:
Monthly gross income derived from asset = (Asset Value x 30%) / 48
For the same $20,000 deposit, your monthly income will be increased by only $125 because of the 30% haircut.
Here, we have an example to see the different amounts needed for pledged and unpledged assets in the event an applicant fails to meet the TDSR:
Say you are jointly purchasing a private property with your spouse and drawing a fixed monthly salary of $3,000, with a personal loan of $500 per month. Your spouse earns a fixed monthly salary of $9,000 and has a car loan repayment of $1,200 per month. Both of you are taking up a 75% loan for your first property of $2,000,000, with a monthly instalment of $7,329.
TDSR = ($500 + $1,200 + $7,329 / $3,000 + $9,000) x 100%
= ($9,029 / $12,000) x 100%
= 75%
As your TDSR exceeds the 55% threshold, you are not eligible to borrow that amount unless you do something.
However, if you and your spouse decide to pledge cash with the bank to qualify for the home loan, the amount of money you will need to pledge can be calculated by reducing the TDSR percentage from 75% to 55%.
Income required to pass TDSR = $9,029 / 0.55
= $16,416
Income shortfall = $16,416 – $12,000
= $4,416
Cash (pledged) = $4,416 x 48
= $211,968
Therefore, you and your spouse will need to pledge a minimum of $211,968 to qualify for the mortgage loan. While, the unpledged method will amount to $706,560 ($211,968 / 0.3) and have to be shown to the bank twice, as mentioned earlier.
Although not pledging your deposits may permit greater flexibility in deploying your funds in the future, it will have little help on your home loan application. This is because the calculation for unpledged deposits only recognises up to 30% of its value, which will result in a marginal increase.
To Pledge or Not Pledge Assets for Home Loans?
When it comes to securing your ideal home loan, the various restrictions and limits can be perplexing. Depending on the TDSR, your financial obligations like your debts and personal income will determine whether you may need to tap on your assets (pledged or unpledged) to augment your borrowing capacity.
Alternatively, if you manage to pay off and reduce the size of your debts or increase your income, you may be able to qualify for the TDSR, having no need to use your assets to augment your income.
But should you decide to tap into your assets to boost your financial standings to qualify for a larger loan, you can choose to pledge your assets or trade that off for more financial flexibility but at a lower borrowing quantum via the unpledged option.
Ultimately, the case of pledging or not pledging and the type of assets used in obtaining your home loan is up to you. It depends largely on your cash liquidity and unique financial situation.
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