How is TDSR calculated in Singapore?

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Singapore’s property market is highly regulated, and borrowers must adhere to strict financial requirements in order to maintain responsible borrowing practices. One essential aspect of assessing affordability in the HDB or Private property market is the Total Debt Servicing Ratio (TDSR). The TDSR serves as a crucial framework implemented by the Monetary Authority of Singapore (MAS) in 2013. TDSR in Singapore serves to safeguard borrowers and promote sustainable lending practices. This article will help you understand how the calculation of TDSR in Singapore affects your home loan.

Understanding Total Debt Servicing Ratio (TDSR) in Singapore and Its Impact on Home Loan Eligibility

TDSR plays a significant role in determining mortgage eligibility and assessing your ability to repay housing loans. Let’s explore what TDSR entails and how it impacts mortgage eligibility.

Firstly, the TDSR is a cap on the total amount you can borrow, limiting the amount you can spend on monthly mortgage debt repayments, based on a percentage of your gross monthly income. The banks will then determine the maximum loan you qualify for based on the allowable amount that you can utilize for your mortgage repayments each month. Currently, a borrower’s total monthly debt obligation is capped at 55% of the gross monthly income.

The TDSR in Singapore is calculated using the following formula:

(Borrower’s monthly debt obligations / Gross monthly income) x 100%

Alternatively, you can work out your TDSR ratio using a TDSR Calculator.

Your monthly debt obligations will include other property loans, car loans, student loans, renovation loans and credit card loans. With regards to the gross monthly income, Financial Institutions (FIs) are required to take a minimum of 30% haircut to variable income and rental income. Additionally, TDSR calculation also takes eligible financial assets into account but with haircuts taken. 

For families and couples that are looking to take on a property loan, the total income and total debt obligations of all applicants will be taken into account for TDSR calculation.

Below are some scenarios and examples of TDSR calculation to help you better understand the different criteria involved:

Scenario 1 – Fixed Income

Mr Wong earns a fixed income of $4,000 a month. His credit card, car and personal loan repayments add up to $1,000 a month. His current TDSR will be $1,000/$4,000 x 100% = 25%

The TDSR threshold is 55% x $4,000 = $2200. If Mr Wong wants to apply for a property loan now, the maximum monthly repayment that he can make would be $2,200 – $1,000 = $1,200.

The banks will then calculate Mr Wong’s maximum loan eligibility based on $1,200, at a higher interest rate to ensure that Mr Wong can still service the mortgage if interest rates go up.

Scenario 2 – Fixed Income with Rental Income

Ms Riya earns a fixed income of $6,000 a month and has a rental income of $4,000 a month. Her existing debt obligations add up to $3,500 per month. The rental income will be subjected to a 30% haircut, meaning only 70% x $4,000 = $2,800 will be taken for the TDSR calculation.

Her current TDSR will be $3,500/($6,000 + $2,800) x 100% = 40%

Scenario 3 – Self-employed/Freelancer (Variable Income)

Mrs Lim is a freelance artist with a variable income that adds up to $72,000 a year. Only 70% of the income (70% x $72,000/12 = $4,200) will be taken into account for the TDSR calculation.

Her current TDSR, with a debt obligation of $1,050, will be $1,050/$4,200 x 100% = 25%.

Scenario 4 – Joint Applicants

Mr and Mrs Toh have a fixed income of $4,000 and $5,000 per month respectively. Mr Toh has a debt obligation of $900 a month. Mrs Toh’s debt obligations add up to $1,100 a month.

Their current TDSR will be ($900 + $1,100)/($4,000 + $5,000) x 100% = 22%

For you are looking to purchase a HDB flat or an Executive Condominium (EC), you will also subjected to the Mortgage Servicing Ratio (MSR). The MSR applies only to home loans taken for HDB flats or ECs, and it is a 30% cap on the borrower’s gross monthly income that goes to servicing a home loan.

So how does the TDSR affect your mortgage eligibility? The TDSR essentially exists for a good reason, to protect borrowers from falling into excessive debt burdens. When taking on a home loan for your property, Financial institutions (FIs) will first review your TDSR ratio before approving your loan. Consequently, your TDSR ratio will affect the loan quantum, which in return may affect the interest rates you would be getting for your home loan. 

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Managing Debt: Tips for Improving Your TDSR Ratio

Maintaining a healthy TDSR ratio is crucial for securing your desired  loan and achieving financial stability.

Here are some tips that can help you improve your TDSR ratio:

1. Reduce existing debts

A simple way to improve your TDSR ratio is to pay off your current debts such as credit loans, educational loans, or one may even consider clearing off your motor loan to reduce your existing debt obligations. As you reduce your existing debts, your TDSR ratio will improve. You should also ensure that you pay all your debts promptly. Late payments would result in a bad credit score, which will also impact your overall loan eligibility.

2. Usage of investment assets

Investment assets such as stocks, unit trusts, bonds, gold or foreign currency deposits are financial and liquid assets that can be counted as your gross monthly income for TDSR assessment, provided that they have been proven and recognized by your FIs. These can help to lower your TDSR ratio and obtain a higher loan amount. Yes, banks can also recognize cash savings to increase your overall loan amount.

3. Loan tenure

Extending your loan tenure can help improve your TDSR ratio by reducing your monthly mortgage repayments. However, keep in mind that a longer loan tenure may result in paying more interest over time. Carefully evaluate the impact of extending the tenure on your overall financial goals before making a decision.

Exploring TDSR in Singapore: Exemptions and Special Considerations

While the TDSR framework sets a maximum threshold for debt obligations, there are certain exemptions and special considerations that borrowers can explore. These exemptions provide flexibility in calculating the TDSR ratio and may increase your chances of mortgage approval.

1. Refinancing the mortgage for owner-occupied residential property

If you are looking to refinance your home loan for a property that you are currently living in, i.e. the property is “Owner-Occupied”, the FIs will provide you with some exemptions from the TDSR framework. In essence, the TDSR limit is increased at the time of refinancing. So if your income had decreased or you have taken on more debt at the time of refinancing, you don’t have to be too overly worried about not being able to refinance your mortgage loan because of the TDSR ratio.

2. Refinancing the mortgage on an investment property

If you have an investment property, you can refinance the loan for that property beyond the TDSR limit if you meet the following conditions:

– At the point of refinancing, commits to a debt reduction plan with his FI, which consists of a repayment of at least 3% of the outstanding loan balance over a period of not more than 3 years.
– The credit assessment of the FI is fulfilled.

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In conclusion, the TDSR in Singapore plays a critical role when it comes to your eligibility for a mortgage. It serves as a financial framework designed to ensure responsible borrowing practices and protect borrowers from excessive debt burdens. By assessing the percentage of your gross monthly income allocated to servicing debts, TDSR determines your ability to handle mortgage repayments alongside other financial obligations. Maintaining a favorable TDSR ratio showcases your financial stability and prudent management of debts. By understanding TDSR in Singapore and its impact on mortgage eligibility, you can make informed decisions about your borrowing capacity. Thereafter, work towards improving your TDSR ratio and increase your chances of securing a mortgage loan.

Clive Chng
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