Singapore has a lax and borrower-friendly loaning system, with laws that protect people from questionable financial practices and high interest rates. This doesn’t mean that there isn’t a measure to keep checks and balances on borrowing money in Singapore. This is the Total Debt Servicing Ratio (TDSR).
What is TDSR?
The Total Debt Servicing Ratio (TDSR) framework places limits on the loan amount a person can borrow and provides a ceiling for how much a bank can lend.
TDSR was implemented by the Monetary Authority of Singapore (MAS), and, unlike earlier measures, the Singapore government is strict about enforcing these limits to ensure that both banks and borrowers are financially responsible for ensuring borrowers can make loan repayments.
TDSR limits the amount someone can borrow based on their gross monthly income (only up to 60%), and every bank and financial institution is required to factor this is when assessing:
- Housing loans/home loans
- The refinancing of housing loans
- Property loans
- Personal loans
- Car loans
- Credit card balances (including “interest-free installment plans”)
- Student loans
How is TDSR different from LTV & MSR?
There’s a lot of acronyms that come into play when you apply for a loan, so it’s important to know the difference between each.
The loan-to-value (LTV) limit pertains to the maximum amount borrowers can apply for from a bank or financial institution. The LTV ratio is based on the asset’s value (like a car or home), while the TDSR framework is regarding the borrower’s total debt obligations and income.
Simply put, you want to purchase something worth $200,000 with a loan-to-value limit of 50%. This means the maximum amount you can borrow is $100,000.
Mortgage Servicing Ratio (MSR) refers to the chunk of the borrower’s gross monthly income that goes to the repayment of property loans, including the one being applied for.
Unlike TDSR, the Mortgage Servicing Ratio only applies to home loans for buying HDB flats and executive condominiums. Calculating MSR also does not factor in your monthly debt obligations and is capped at 30% of your gross monthly income.
These limits are often considered simultaneously when applying for a loan from financial institutions. This means that borrowers wanting to purchase HDB flats have to meet LTV, MSR, and TDSR requirements to get a property loan.
Why is TDSR required?
The TDSR framework was implemented to make sure loans are only issued to those who can afford them and help borrowers consider how loans can affect their budget.
This overall encourages financial prudence and secures borrowers from being buried in monthly repayments they can’t afford, and keeps financial institutions from giving out loans that borrowers can’t handle.
Finally, it also keeps property prices from increasing, as home applications were used to borrow large sums for property investing and speculation. The purchased existing property is then sold at a higher price to actual home buyers. TDSR rules and that of other cooling measures ensure this no longer happens and that the property market is sustainable.
How to calculate TDSR
If you don’t factor in other cooling measures, the TDSR formula is quite a simple one:
Total Monthly Debt Obligations/Gross Monthly Income
Total Monthly Debt Obligations
Monthly debt obligations include any debt with an outstanding balance that requires monthly repayment instalments. This includes outstanding debts like revolving loans, renovation loans, student loans, car loans, their home loan/s and mortgage repayments (along with any other being applied for), credit card debt, and any other types of loan repayments for secured or unsecured loans.
Gross Monthly Income
Gross monthly income includes the borrower’s monthly income before tax and excludes CPF contributions. It’s important to note that, as an added safety measure, banks are required to apply a “haircut” of 30% on variable income and rental income as a precaution for their lack of stability.
Any individual with variable income (like commissions and bonuses) and rental income will likely have a lower limit compared to salaried individuals of similar income amounts.
How does TDSR affect your ability to secure loans (personal loans, home loans, etc.)?
TDSR calculation is simple enough, but when factoring in other cooling measures and other adjustments to remove exploitable loopholes in the original framework, the calculation becomes much more complicated.
Here are some ways loan application is affected by the TDSR:
- TDSR complements Loan-to-Value limits
- New rules for loan tenure apply, capping to up to 35 years.
- Issuance of stress-test interest rate
- Haircuts of 30% for variable income
- Guarantors and mortgagors are treated as borrowers.
1. TDSR complements Loan-to-Value limits
If you already have a different home loan, this can contribute to the LTV limit. From 80%, the maximum can become a lot lower. This is, of course, to ensure that you do not add to your overall debt by adding another refinancing or home loan.
2. New rules for loan tenure apply
As per the TDSR rules, the maximum loan tenure for housing loans is capped at:
- 30 years for an HDB flat.
- 35 years for any non-HDB property.
This also means that age roping is less effective. Age roping or the method of extending the tenure of the loan by adding a younger co-borrower whose younger age will be the basis for calculation.
With TDSR, only income-earning individuals can be counted as co-borrowers with their median age factored in.
This means the income-weighted average age of joint borrowers is used to determine loan tenure.
3. Issuance of a stress test interest rate
A home loan or mortgage tends to be long-term and can be subject to fluctuating interest rates. With TDSR, financial institutions standardized the stress test interest rate at 3.5% for residential properties and 4.5% for commercial and industrial properties.
This greatly affects the total amount an individual can borrow, also called the “loan quantum,” even without an existing debt.
4. Haircuts for those with variable income
Self-employed individuals and those who earn money through commissions, rent, and other less-stable sources are factored in as variable income and are calculated as 30% less than they are.
This overall affects the calculation of their monthly income, which in turn affects TDSR and the loan amount.
5. Guarantors and mortgagors are treated as borrowers
A borrower named on a residential property loan is required to also be the mortgagor of that property.
Lenders must verify that the borrower is listed in the property’s documents: both as a purchaser on the Option to Purchase form and a mortgagor on the Land Titles Act mortgage document.
Any other individual who assists in the loan to meet the TDSR threshold will be considered a co-borrower instead of a guarantor.
Lower LTV limits will apply to their future home loan applications.
Exemptions to TDSR
There are, thankfully, a few exemptions to the TDSR rules. If borrowers are applying for a refinancing loan and their debt exceeds the 60% mark, they are exempted if they are owner-occupiers refinancing their homes.
Owner-occupiers are exempted from the total debt servicing ratio if:
- they do not own any other property besides the current owner-occupied property they are looking to refinance, and
- they do not hold any other property loans.
Since the 1st of September in 2016, all owner-occupied residential properties may be refinanced above the TDSR threshold of 60 percent as long as:
- at the point of refinancing the borrower to a debt reduction plan with the bank or FI to repay at least 3% of the outstanding balance in not more than three years
- the borrower passes the credit assessment criteria of the bank or FI.
Committing to a debt reduction plan and passing the credit assessment also applies to residential properties that are not owner-occupied but are purchased for investment purposes.
The bottom line
The TDSR and other measures are important to keep in mind when looking to apply for a loan, as this can greatly affect many aspects and requirements that you need to meet.
If you need a loan that gives you the best deal for your current TDSR ratio, consider contacting us at A1 Credit. We are a licensed moneylender in Singapore dedicated to providing excellent assistance and effective solutions for your financial needs.
