As if home loans themselves aren’t complicated enough, you now have this thing called the Total Debt Servicing Ratio (TDSR). The thing is, it’s actually here for good reason - from helping borrowers manage their debt, to keeping the Singapore property market healthy.
In this article, we dive into what TDSR is all about, including how it affects how much you can borrow to finance your dream home.
What is the TDSR?
In a nutshell, the TDSR limits the amount that you can spend on your monthly debt repayments (student loans, car loans, personal loans, etc) to 60% of your gross monthly income.
The TDSR was introduced by the Singapore government in 2013 to make sure individuals borrow responsibly, and not end up drowning in debt.
Unlike other cooling measures, which are expected to be temporary, the TDSR is a permanent reform that all banks and financial institutions must follow when assessing the following:
- Housing loans
- Refinancing of housing loans
- Loans secured by property
Why was the TDSR introduced?
The TDSR framework seeks to ensure that borrowers don’t take on more debt than they can handle, and that financial institutions lend responsibly.
The TDSR aims to ensure loans are only issued to borrowers who can afford them, and help borrowers consider the true budgetary impact of a mortgage.
More notably, the TDSR was implemented to manage property speculation in Singapore. In the past, many individuals would borrow large sums of money to purchase property, and then flip them to earn profit.
All in all, the TDSR helps prevent high-risk loans from being issued, and goes toward standardising the framework banks use when assessing a borrower’s capacity to make loan repayments.
How will the TDSR affect your home loan?
The TDSR limits the amount you can borrow – your loan quantum – by ensuring your monthly debt repayments account for less than 60% of your income.
The more debt obligations you have - things like student loans, car loans, credit card bills, personal loans, and other miscellaneous financial obligations - the less you might be able to borrow from the bank for your home loan. You might also have to stretch out the repayment period of your home loan so as to keep within the TDSR limits.
With a more restrictive mortgage framework in place today, do note that the following will also apply to your home loan:
- Loan-to-Value ratio: The proportion of the property’s value of which you’re allowed to borrow to finance the property
- Loan tenure rules: The loan tenure is capped at 30 years for HDB properties, and 35 years for non-HDB properties
- A stress-test interest rate, currently 3.5% for residential properties, will be used.
- This means that home loan applicants must still be able to maintain a TDSR of 60% or below, even if the interest rate increases to 3.5%.
- Variable income and certain financial assets, such as rental income, are subject to a ‘haircut’.
- This ‘haircut’ applies to individuals who have variable income, such as freelancers or those who are self-employed. As they are considered more risky borrowers, only 70% of their total assessed income is factored in for the TDSR.
- Guarantors, mortgagors, and borrowers are now effectively one and the same.
If you’re taking out a loan with someone else as a joint borrower, then the TDSR will be calculated based on the following:
- Aggregate gross monthly income of both borrowers
- The debt obligations of both borrowers
- The loan tenure, which is determined by the income-weighted average age of borrowers
How exactly is TDSR calculated?
The TDSR is calculated by dividing a borrower’s total monthly debt obligations by gross monthly income.
Here are some examples to help you better understand how TDSR works.
Ben earns a fixed income of S$10,000 per month.
The sum of his credit card, car loan, and personal loan repayments is $4,500 per month.
TDSR = (Total monthly debt obligations)/(Gross monthly income) = $4,500/$10,000 = 45%
His TDSR threshold is $6,000 (60% of $10,000).
If Ben wants to apply for a property loan, the maximum repayment he can make each month will be $1,500 ($6,000 - $4,500) under the TDSR rules.
If he wants a larger loan, he’ll need to pay off his outstanding debts.
Chris earns a fixed income of $7,000 per month plus rental income of $3,000 per month.
His variable income is subject to a 30% ‘haircut’, so his gross monthly income is $9,100 ($7,000 + $2,100). His existing debt obligations come up to $4,500.
TDSR = (Total monthly debt obligations)/(Gross monthly income) = $4,500/$9,100 = 49%
Shirley has a fixed income of $2,500 per month and debt repayments of $1,000.
Her husband’s gross monthly income is $5,000 and his debt repayments total $3,000.
TDSR = (Total monthly debt obligations)/(Gross monthly income) = $4,000/$7,500 = 54%
Does TDSR take into account investment assets?
Fortunately, they do!
If you have financial assets like stocks, unit trusts, bonds, gold, foreign currency deposits, and other liquid assets, you can use them to count toward your monthly income.
How does the Mortgage Servicing Ratio (MSR) come into play with the TDSR?
Apart from the TDSR, you’ll also need to factor in the MSR if you’re buying a HDB flat or an EC.
If you’re buying an HDB flat (both brand new and resale) or an EC, you have an additional criteria to look out for other than the TDSR - the Mortgage Servicing Ratio (MSR).
Under the MSR framework, the monthly mortgage payments for your HDB flat or EC cannot exceed 30% of your household income.
So let’s say your other loan obligations amount to only 10% of your monthly household income. Although the TDSR limit is 60%, you can’t simply commit 50% of your household income to pay off your HDB flat or EC monthly, hoping to pay off your home much faster.
With the MSR, you can only use up to 30% of your household income.
Here’s a quick comparison of the TDSR and MSR.
(Monthly debt repayments)/(Gross monthly income)
(Home loan repayments)/(Gross monthly income)
Are there any TDSR exemptions?
As with most rules and frameworks in SIngapore, there are exemptions in place to create leeway for certain individuals and situations.
1) Owner-occupiers refinancing the loan for their property
An existing borrower who’s looking at refinancing his property loan will be exempted from the TDSR framework if he is an owner-occupier.
This is essentially a concession for those repaying the loan for the home they live in.
2) Refinancing of investment property loans
In addition, borrowers can refinance their investment property loans beyond the TDSR limit if these conditions are fulfilled:
- At the point of refinancing, the borrower commits to a debt reduction plan with the financial institution, which is to consist of a repayment of minimally 3% of the outstanding balance over not more than 3 years.
- The financial institution’s credit assessment is fulfilled.
3) Mortgage equity withdrawal loans (MWLs)
Furthermore, the TDSR framework doesn’t apply for mortgage equity withdrawal loans (MWLs). These are basically loans where property owners borrow cash against their property’s paid-up value.
The TDSR rules will not apply for these MWLs as long as the LTV of the loan does not exceed 50% when aggregated with other loans secured on the same property.
MAS created this provision so that homeowners, especially those who are retired, can monetise their property.
4) Exceptional cases
The TDSR framework also includes provisions for financial institutions to grant property loans exceeding the 60% threshold for exceptional cases, provided these conditions are met:
- The exceptional reasons are clearly documented by the financial institution.
- The financial institution subjects these cases to enhanced credit evaluation.
- The financial institution implements a debt reduction plan with these borrowers.
- The case is reported to MAS.