After the crazy run-up of property prices in the years leading to 2013, the Monetary Authority of Singapore(MAS) finally stepped in with measures to “cool” the property market. One key measure that was introduced is the Total Debt Servicing Ratio(TDSR).
The TDSR is brought in to encourage financial prudence – in simple terms, it limits a person’s financial commitment to debts to below 60% percentage of his gross monthly income.
What’s key is that it does not only apply to mortgage loan alone, rather, it takes into account all the possible debt/loan a borrower current has.
Another important thing to note is that the mortgage calculation process is now more stringent, as you’d need to use the stress-test interest rate of 3.5% as a basis to calculate your monthly mortgage repayments.
How the TDSR is calculated
We have Benny, who earns a monthly income of $6,000. His monthly debts include $500 credit card bills, a car loan of $1,000 and a personal loan of $1,500.
Total monthly debt obligations/ gross monthly = 3000/6000
Since his TDSR threshold is 60%, it works out to be 60% of $6,000, which is $3,600.
With the ongoing monthly commitment, he can only take up a loan with a maximum monthly repayment of $600. If he wants to take up a bigger loan to afford the apartment he wants, he will need to work on either increasing his monthly income, or reducing the other debts/loans he has.
There is a different way of calculation for those who are drawing variable income. This is applicable to those who may be self-employed, or who has an income based on commission.
Because variable income is seen as “less-stable” compared to a fixed income, the MAS has introduced a 30% haircut on the monthly income.
Let’s say Benny changed his job to a sales director role. His annual pay package came up to $115k, with $72,000 in fixed pay and $43,000 worth of commission.
With a lower TDSR, he will be able to service a higher monthly mortgage repayment.
*Use our FREE TDSR calculator to do a calculation today!
4 ways the TDSR affects a homeowner:
1. Even with a high salary, you may not qualify for a loan if you have other debts
Say Benny is looking to buy a condominium priced at $1 million. He will need to borrow $800,000 from the bank. His monthly repayment works out to be $3,592 per month.
|Loan amount||Medium-tern interest rate||Tenure||Monthly repayments|
Adding this to his current monthly debt obligations of $3,000, his TDSR ratio will be at 75%, which is way over the 60% threshold.
However, if he is able to reduce his monthly obligations to just $1,000, he will make the TDSR threshold at 52%.
2. If you have a commission job, you may not meet the requirements
The TDSR ratio penalises those who are not drawing a fixed salary with the 30% haircut. This includes those who are self-employed. Imagine that you are earning an average of $8,000 a month, but you can now borrow only based on a salary calculation of $5,600.
As a result, this can limit the loan quantum, as well as the type of property choices you have.
3. No use of guarantor to secure a loan if you can’t qualify
Before the introduction of the TDSR, borrowers were able to get a guarantor to secure their mortgage loan if they didn’t meet the requirement. Well, you can’t do that anymore.
When the TDSR was implemented, it caused some problems for homeowners with loans taken before 2013 and looking to refinance. Take for instance, someone who took a loan in 2013 and wanted to refinance in 2015, only to find that he couldn’t because of an increase in his total debt obligations (e.g car loan).
Luckily, this has been rectified by changes in 2016 which exempt such borrowers from the TDSR limit when refinancing. However, if the mortgage is for an investment property, they can only refinance above the 60% TDSR threshold if they fulfil 2 conditions:
- commits to a debt reduction plan with his financial institution to repay at least 3 per cent of the outstanding balance over a period of not more than 3 years; and
- fulfils his financial institution’s credit assessment.
Understanding the TDSR is important in your property search, as it can limit the type of property you are looking for. If you need advice on this, you can contact us here.