6 facts about the Total Debt Servicing Ratio (TDSR) all property purchasers need to know

 

6 facts about the Total Debt Servicing Ratio (TDSR) all property purchasers need to know

The Monetary Authority of Singapore (MAS) set this back in 2013, implementing the Total Debt Servicing Ratio (TDSR). TDSR is a system that shields borrowers against over-leveraging for their property purchase(s). Generally, it takes into account the amount that people can spend on month-to-month contractual obligations/loans, in view of a level of their gross month to month pay. All banks and monetary establishments in Singapore must adhere to the TDSR.

Right now, the all month-to-month obligatory commitments of any given individual or family unit—depending upon whether the property is a single or joint buy—is maintained at 60% of gross pay. While this may appear to be easy and straight forward, there are many conditions and special cases that encircle around the TDSR.

To help you plan properly your property and settle on informed and educated monetary choices, we have set out below 10 critical points that all property purchasers need to know before putting that cheque down.

1.       Current outstanding debt obligations

It is not as straight forward as one thinks. MAS states that the maximum TDSR is at 60% of an individual’s fixed monthly income. But one needs to know that any existing debt obligations will count together against this and reduce the maximum amount one can borrow. These debt obligations include (not exhaustive):

• Credit card balances (including instalment plans for items purchased)
• Student loans
• Car loans
• Personal loans
• Obligations as a guarantorSo before one makes a property purchase, and in order to obtain a higher (or highest) maximum loan amount up to the full 60% TDSR, please plan ahead to pay off as many debts as possible so as to be able to get the maximum loan. This is important as many get caught by surprise here.

2.                   Self-Employed? A ‘haircut’ on variable income

Lucky individuals who are gainfully employed on a fixed salary (income) will only enjoy the full TDSR. However, if you are an individual who is self employed or employed with variable income (e.g. freelancers, odd-job workers, self-employed), you are unfortunately deemed as “more risky” by lenders, hence only 70% of their total assessed income is counted towards the TDSR.

To give a simple example, if a self-employed professional earns $40,000 a year, only 70% of the $40,000 = $28,000 is counted as yearly salary. His/her TDSR would then be 60% x $28,000/12 months = $16,800, meaning only $1,400 a month can go towards the loan/debt repayment.

A fully employed person on the same salary would have gotten 60% x $40,000/12 months = $2,000, meaning $2,000 a month can go towards debt repayment.

So, if you are thinking of quitting that full time salaried role, think carefully especially when there is an intention in buying a property.  A home loan applicant with variable income can only get 70% of the loan amount that an applicant with fixed income can, under the TDSR framework, reducing the final purchase price of the property.

3.                   Rental Income - ‘haircut’

In Singapore, the 70% of rental income is counted like in Point (2).

4.                   Investment assets can be included in TDSR

To help boost up one’s TDSR, investors can use their stocks, unit trusts, business trusts, debentures or bonds, gold, foreign currency deposits and structured deposits towards counting of one’s monthly income. So as long as you can show proof of such assets to banks, and they have them recognised as income, one could obtain a higher loan amount. However, like in Pt (1) and (2), a haircut of 70% is taken of the total assessed income from your assets.

On another note, no haircut is required if one decides to pledge these assets to the bank, or financial institution for a specific time period (e.g. four years).

 

5.                   Buyers of HDB flats and ECs are subject to an additional criteria

For buyers of new or resale Housing & Development Board (HDB) flats and Executive Condominiums (ECs), they are also subject to more stringent criteria, the Mortgage Servicing Ratio (MSR), on top of TDSR. The MSR states that monthly mortgage repayments for the HDB flat or EC should not exceed 30% of total household income.

So, although you technically have 60% TDSR in this case, only half of this 60% can be used to pay off your mortgage (e.g. $3,000 out of a $10,000 gross fixed monthly income). The remaining 30% goes towards servicing other debts (e.g. car loan), if any.

 

6.                   Investors - Refinancing does not come under the TDSR framework, unless its an investment housing loan

MAS allows all owner-occupants to be exempted from the TDSR framework when refinancing their owner-occupied housing loans (as long as they passed their respective financial institution’s credit assessments).

For investors, investment (where it is not owner occupied) housing loans , the TDSR framework still applies when refinancing. Some breathing space is allowed and the owner may refinance his/her property loan above the 60% TDSR threshold, if he/she meets the following conditions:

(a) commits to a debt reduction plan with his financial institution to repay at least 3% of the outstanding balance over a period of not more than 3years; and
(b) fulfils his financial institution’s credit assessment

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