One of the most important things you need to know before you even start looking for a new home is how much you are able to borrow. Without knowing this information, you might end up going in circles, looking at properties that you can’t afford and wasting much precious time. By calculating first hand how much you can borrow and afford can help you limit your choices from the thousands of properties available and give you an optimal way around your property search and purchase.
Total Debt Servicing Ratio(TDSR)
The TDSR was introduced in 2013 by the Monetary Authority of Singapore(MAS) as a form of property-cooling measure. To put it simply, the TDSR limits a person’s financial commitment to debts to below 60% percentage of his gross monthly income.
How this affects home loan borrowers is that you’d need to ensure you stay below the 60% TDSR limit when you take up a mortgage loan. Additionally, the TDSR applies to all other types of debts/loans you currently have, including personal loans, car loans and credit card usage.
While this can make it a little difficult for some borrowers, especially those who may be cash-rich but earning less in fixed monthly income to borrow what they need, there are certain ways you can work around to help you borrow more. Here’s a look at some of them:
- Reduce existing debts
The easiest ways to overcome your TDSR limit is to work on cutting out the other debts you have. If you have an existing car loan or personal loan, work towards repaying that before you apply for your home loan. Otherwise, you may want to ensure you have no existing credit card debts. If you are making full repayments on credit cards usage, banks will not deemed the usage as debt. Thus, reducing your current debts may be able to help you qualify for a higher loan quantum
If you are asset-rich, you can consider pledging your asset in order to meet the TDSR requirements. There are two main types of assets that you can consider for pledging:
1) Liquid assets comprising Singapore dollar notes and coins
2) Other assets including:
- Units in an authorised collective investment scheme
- Units in an authorised business trust
- Stocks
- Structured deposits
- Foreign currency and notes
- Gold
Do however note that the bank will not use the full value of the pledged assets, but rather apply a discount in value ranging from 0 to 70% depending on the pledging tenure. Generally, a longer pledging tenure will incur less discount in value.
Pledging your assets can definitely be helpful in meeting your “monthly income” requirements, but not all banks accept this method of financing. You can enquire with us to find out more about how to use this approach in getting your home loan.
- Work around your income requirements
The TDSR takes into account your monthly income, and this can be a barrier for those who might have recently left their job or are self-employed. For those who are thinking of leaving their current job, you might want to apply for your loan before you leave. In any case, the bank will assess your income based on your latest IRAS Notice of Assessment.
For self-employed persons, this can be a little tricky because you will be subjected to a 30% haircut. There are however, so ways to work around it, such as setting up a company and becoming an employee instead of the employer instead. Some entrepreneurs may also declare a low personal income in order to pay lower taxes. This is why you should be declaring the right amount since it can impact your borrowing limit.
Before you start your property search, it is important to figure out your TDSR – a good mortgage broker can help you navigate the requirements effectively and make your loan application a smoother process. Contact us today if you need advice on how to work around your TDSR limit.
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