In Singapore, there is a term known as the Total Debt Servicing Ratio (TDSR), as if the actual process of taking out a mortgage wasn’t already confusing enough. The problem is, that it is actually here for a good cause – from assisting borrowers in effectively managing their debt to ensuring the continued soundness of the Singapore housing market.
In this piece, we will discuss what the Total Debt Service Ratio (TDSR) is, the method used to calculate the TDSR, and how the TDSR influences the amount of money you can borrow to put toward the purchase of your ideal home.
What Is Total Debt Servicing Ratio (TDSR)?
In a nutshell, the Total Debt Service Ratio (TDSR) places a cap of 55% on the amount of your gross monthly income that can be applied toward the repayment of your monthly debts (such as student loans, car loans, and personal loans, among others).
The Total Debt Servicing Ratio Regulation (TDSR) was initiated by the government of Singapore in 2013 with the intention of ensuring that individuals borrow money in a responsible manner and do not become overwhelmed by their debt. The original percentage was 60%, however, on 16 December 2021, it was changed to 55%.
In addition, the computations that determine how much you are able to borrow based on TDSR will be modified as a result of an increase of 0.5% in the medium-term interest rate that is utilized in the calculations.
When evaluating any of the following, all banks and other financial institutions are required to comply with the TDSR since it is a reform that is here to stay.
- Mortgage Financing
- Refinancing of existing mortgages on homes
- loans that are guaranteed by an asset
Why Was the TDSR Introduced?
The objective of the TDSR is to promote responsible lending practices among financial institutions while also preventing borrowers from taking on more debt than they can reasonably repay.
The objective of the TDSR is to prevent lending to people who can’t pay back their loans and to encourage people applying for mortgages to give careful thought to the financial repercussions of getting one.
To curb rampant real estate speculation, Singapore adopted the TDSR. It used to be common practice for people to take out huge loans in order to buy multiple properties at once and quickly resell them for a profit.
The whole effect of the TDSR is to reduce the prevalence of high-risk lending and to standardise the criteria that financial institutions employ to determine whether a borrower is likely to be able to repay a loan.
How The TDSR Affects Your Home Loan
If your monthly debt repayments are more than 55% of your income, the Total Debt Service Ratio (TDSR) will reduce the amount you can borrow (your loan quantum).
You may be limited in the amount of money a bank would lend you for a house loan if you have existing debts such as student loans, car loans, credit card bills, personal loans, and other unsecured debts. To remain under TDSR guidelines, you may need to extend the length of time it takes to pay off your mortgage.
Due to the current more stringent mortgage framework, the following will also apply to your house loan:
- The ratio of the amount borrowed to the value of the collateral being loaned out. The maximum amount of money you can borrow in relation to the property’s value.
- Loan Repayment Policy: The maximum loan term for HDB properties is 30 years, while that for non-HDB buildings is 35 years.
- The market rate of interest will be used as a stress test, which is now 4% for homes.
- This means that even if the interest rate on a house loan were to rise to 4%, borrowers would still be required to keep their Total Debt Service Ratio (TDSR) at 55% or lower.
- A ‘haircut’ can be applied to your earnings if they are based on something ephemeral, such as rental income, or on certain financial assets.
- This “shave” is for people whose income is unpredictable, such as contractors or the self-employed. Since they pose a greater credit risk, the TDSR only takes into account 70% of their assessed income.
- There is no longer any distinction between a guarantor, a mortgagor, and a borrower.
When determining the TDSR for a loan with a cosigner, the following factors will be considered:
- The sum of the two borrowers’ monthly gross incomes
- The combined debts of the two debtors
- The period of the loan is based on the average age of borrowers relative to their income.
TDSR Calculation
Total monthly debt obligations are divided by gross monthly income to arrive at the TDSR.
TDSR Formula
The ratio of the borrower’s monthly gross income to his or her total monthly debts expressed as a percentage
(Borrower’s total monthly debt obligations / Borrower’s gross monthly income) x 100%
TDSR Calculator
Using our TDSR calculator is the simplest method for determining your TDSR. The TDSR calculator only requires you to enter your income and other financial commitments.
Here Are Some TDSR Examples
Fixed Income
Ben receives a steady monthly salary of $10,000. His monthly debt payments total $4,500 between his credit cards, auto loan, and other loans.
- Total debt service ratio (TDSR) = gross monthly income (GMI) / total monthly debts ($4,500) = 45%
- There is a $5,500 cap on his TDSR (as a percentage of $10,000).
- Ben can apply for a mortgage, but the TDSR limits his monthly payment to $1,000 ($5,500 minus $4,500).
Paying off his current obligations is a prerequisite for applying for a larger loan.
Variable Income
Chris has a steady monthly income of $7,000 thanks to his fixed income, plus another $3,000 because to his rental income. Since 30% of his ‘haircut’ is deducted from his variable income, his take-home pay each month is only $9,100 ($7,000 + $2,100). His current debts amount to $4,500.
- Total monthly debt service obligations divided by gross monthly income (4,500/9,100) is 49%, or the TDSR.
Joint Applications
Shirley is making $2,500 per month after taxes and making $1,000 per month in debt payments. Her husband has a $5,000 monthly income but must pay back $3,000.
- Total monthly debt service ratio = gross monthly income all monthly debt payments $4,000 $7,500 = 54%
Does TDSR Take Into Account Investment Assets?
Thankfully, they are. Monthly income can include investments such as equities, unit trusts, bonds, gold, foreign currency deposits, and other liquid assets.
TDSR vs Mortgage Servicing Ratio (MSR)
The Mortgage Servicing Ratio (MSR) is an extra criterion to keep in mind when purchasing an HDB apartment (both new (Built-to-Order (BTO) and resale) or a new executive condominium (EC).
Your HDB or EC mortgage payment under the MSR framework cannot exceed 30% of your monthly household income.
Let’s assume that your total monthly loan payments don’t exceed 10% of your take-home pay. You can’t just put away 45% of your monthly salary toward your HDB flat or EC in the hopes of paying it off more quickly because the TDSR ceiling is 55%.
You can only spend up to 30% of your income on the MSR.
TDSR Exemptions
Exemptions exist for most Singaporean regulations and frameworks to allow for some wiggle room.
1. Owner-occupiers refinancing the loan for their property
Existing borrowers who are owner-occupants and are interested in refinancing their property loan will not be subject to the TDSR framework.
This is a break for people who are currently paying off a mortgage on their primary residence.
2. Refinancing of investment property loans
In addition, under the right circumstances, borrowers can refinance investment property loans above the TDSR cap.
- At the time of refinancing, the borrower agrees to a repayment schedule with the financial institution to pay off at least 3% of the principal balance within a maximum of 3 years.
- Credit requirements of the bank have been met.
3. Mortgage equity withdrawal loans (MWLs)
Furthermore, mortgage equity withdrawal loans (MWLs) are exempt from the TDSR framework. These loans are essentially cash advances against a property’s current paid worth.
If the combined LTV of all loans secured by the same property does not reach 50%, then the TDSR requirements do not apply to these MWLs.
To help homeowners, especially retirees, monetize their homes, MAS established this option.
4. Exceptional cases
There are provisions in the TDSR framework that allow financial institutions to extend property loans in excess of the 60% level in extraordinary circumstances, subject to the following conditions:
- The bank keeps meticulous records detailing the extraordinary circumstances.
- The bank will do a more thorough credit check on these customers.
- The financial institution works with these customers on a debt consolidation program.
- MAS has been informed of the situation.
Read Also: How Do You Get An Equity Term Loan?
