RES exam question on Financing: A borrower's loan is stress-tested and capped by several rules
A borrower's loan is stress-tested and capped by several rules. Banks assess repayment ability using a stipulated medium-term interest rate floor, loan tenure is subject to maximum caps, and TDSR limits total monthly debt to 55% of gross monthly income. Which is/are correct? (i) Eligibility is assessed using a stress-test (medium-term) interest rate, not just the actual promo rate (ii) Maximum loan tenures are capped (e.g. for private property bank loans) (iii) A longer tenure lowers the monthly instalment but can reduce the maximum LTV/raise costs overall (iv) Banks must assess affordability solely at the current promotional interest rate
- A(i), (iii) and (iv) only
- B(i) only
- C(ii) and (iii) only
- D(i), (ii) and (iii) only
Show answer & explanation
Answer
D. (i), (ii) and (iii) only
Explanation
(i) is correct: banks assess eligibility using a stipulated medium-term stress-test rate, not the low promotional rate. (ii) is right because maximum loan tenures are capped (e.g. for private property bank loans). (iii) holds because although a longer tenure lowers the monthly instalment, tenures that are long or run past retirement age can trigger a lower maximum LTV and higher total interest.
Why the other options are wrong
- (iv) is false and the trap: affordability is tested at the higher medium-term rate, not solely the current promo rate.
Study the concept behind this question: Property Financing in Singapore: LTV, TDSR & MSR
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