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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. Therefore, many people are probably thinking of ways to minimise the downpayment of a dream home, such as taking up a 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 your asset can be a handy option to augment your income and increase your borrowings, bringing you a step closer to your dream home.
But even when pledging your assets, there are different ways to go about it too. In this article, we sought the expertise of PropertyGuru Finance mortgage experts Ethan Ng and Ben Goh to learn more about the role of asset pledging in home loans, with a specific 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:
Eligible financial assets
Cash deposits, bonds, unit trusts, listed company shares
Un-encumbered funds to draw on in a short period of time
Cash must be deposited in a fixed deposit with the mortgage lender for 48 months (from the start of the loan)
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 December 2021, and with the TDSR further reduced to 55%, you may find yourself experiencing some difficulties when trying to meet the TDSR limit.
You may calculate your TDSR based on the formula below:
Property-related loans (including the loan being applied for)
Credit card loans
Any other secured or unsecured loans (including revolving loans)
**Before tax and excluding any CPF contributions made by the employer.
As Ethan shares, 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:
Eligible financial assets
Pledged for a minimum of 4 years
Pledged for less than 4 years or unpledged
(e.g. Singapore dollars and coins, including deposits)
Minimum 0% haircut
Minimum 70% haircut
Other financial assets:
Foreign currency notes and coins, including deposits
However, do keep in mind that not all banks accept asset pledging, with some preferring conventional downpayments 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. As Ben shares, “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 ask to see the funds twice: during the loan application, and before loan disbursement,” mentions Ethan.
Let us look at the formulas for converting pledged and unpledged assets to income.
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 fail 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 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.
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
Income shortfall = $16,416 – $12,000
Cash (pledged) = $4,416 x 48
Therefore, you and your spouse would 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 near 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.
If you manage to pay off and reduce the size of your debts or increase your income, you would 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.
Ultimately, the case of pledging or not pledging and the type of assets used in obtaining your home loan is up to you. As Ben also points out, this “depends largely on the cash liquidity of individuals as every situation is different.” However, if you’re still feeling a little confused at this point, fret not, as our friendly PropertyGuru Finance Mortgage Experts are here to offer you their relevant expertise and input.
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More FAQs on Using Unpledged Assets for Your Home Loan in Singapore
What Are the Options When Pledging Your Assets?
Pledged or unpledged assets can be used to secure a higher loan, but the amount depends on the asset type and method of pledging.
Can I Use the Unpledged Assets for Downpayment?
In reality, this would not be possible since you are expected to show your lender the funds twice during the loan application stage and before loan disbursement.
When I Use Unpledged Assets, Do I Need to Leave Them With the Bank?
Generally speaking, no. But it is best to check with your lender, as each loan may vary.
Why Would I Use Unpledged Assets Since It Is More Than the Downpayment?
People who choose unpledged assets may want to invest them in stocks or bonds, or may not need the cash now but will have use for it in the future.
What Should I Do if My Asset Class Is Not Accepted as Unpledged?
Because not all asset classes are accepted, you may need to show something else to the bank when applying for a home loan.
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