The Total Debt Servicing Ratio (TDSR) is a financial regulation introduced by the Singapore government in 2013 to promote responsible borrowing and prevent excessive debt burdens. It limits the amount individuals can spend on monthly debt repayments, such as student loans, car loans, and personal loans, to 55% of their gross monthly income. Previously set at 60%, the TDSR was revised to 55% on 16 December 2021.
In addition, the TDSR calculations are impacted by changes in the medium-term interest rate, with a recent 0.5% increase affecting the borrowing capacity of individuals.
The TDSR is a permanent requirement that all banks and financial institutions in Singapore must adhere to when evaluating loan applications for housing loans, refinancing of housing loans, and loans secured by the property. Its implementation ensures that borrowers maintain a sustainable level of debt relative to their income.
Purpose Of TDSR Implementation
The TDSR framework promotes responsible borrowing and ensures borrowers avoid excessive debt. It also holds financial institutions accountable for lending responsibly. Its main objective is to assess the affordability of loans and give borrowers a realistic understanding of the financial impact of a mortgage.
A significant motivation behind implementing the TDSR was to regulate property speculation in Singapore. Previously, individuals would borrow large sums of money to buy properties and quickly sell them for profit. The TDSR helps curb such speculative practices by imposing stricter loan assessment criteria.
Also, it plays a crucial role in preventing the issuance of high-risk loans and establishing a standardized framework for banks to evaluate a borrower’s ability to meet loan repayment obligations.
How To Calculate TDSR?
To calculate TDSR, divide total monthly debt obligations by gross monthly income and multiply by 100%.
(Borrower’s total monthly debt obligations / Borrower’s gross monthly income) x 100%
Debt obligations considered are property loans, credit card debt, car loans, student loans, and other secured/unsecured loans.
Credit Card Debt Calculation: Minimum monthly repayment amount is considered (e.g., $50 or 3% of the outstanding balance, whichever is higher)
- Importance Of Managing Credit Card Debt: High outstanding balances on multiple credit cards significantly increases your monthly debt obligations. This means you must allocate a larger portion of your income towards servicing these debts, leaving you with less disposable income for other expenses or savings. Failure to manage credit card debt can lead to financial strain, missed payments, and potential damage to your credit score.
- Impact On Borrowing Capacity: The TDSR framework also considers your debt obligations when determining your borrowing capacity. Higher debt obligations, such as credit card debt, can limit the amount borrowed for a property loan.
The TDSR calculates the maximum amount you can borrow based on your gross monthly income and existing debt commitments. If a significant portion of your income is already tied up in credit card debt repayments, it reduces the amount available for servicing a property loan. This can restrict your borrowing capacity and potentially limit your options regarding purchasing a property or securing favorable loan terms.
Example Scenario
Gross monthly income of $4,000 and TDSR limit of 55% ($2,200).
Illustration Of Debt Obligations: $200 for credit cards (4 cards with a $250 outstanding balance each) and $1,000 for a car loan.
Calculation Of Available Monthly Repayment for Property Loan: $2,200 – $200 (credit cards) – $1,000 (car loan) = $1,000.
Maximum Borrowing Amount for Property: Determined by applying a stress test with a minimum interest rate (e.g., 4.0%).
Managing debt, particularly credit card usage, is crucial to maximizing borrowing capacity for a property loan following TDSR guidelines. You can increase your disposable income and improve your eligibility for future loans, including property loans.
TDSR Framework
- The TDSR framework limits the loan quantum by ensuring monthly debt repayments account for less than 55% of the borrower’s income.
- Debt obligations such as student loans, car loans, credit card bills, and personal loans reduce the amount a borrower can borrow and may require a longer repayment period to meet TDSR limits.
- The stress-test interest rate of 4% for residential properties is used to assess if borrowers can maintain a TDSR of 55% or below, even if the interest rate increases.
Loan-to-Value (LTV) Ratio and Tenure Rules
- The LTV ratio determines the proportion of the property’s value that can be borrowed for financing.
- The loan tenure is capped at 30 years for HDB properties and 35 years for private properties.
Treatment of Variable Income and Financial Assets
- Individuals with variable income, such as freelancers or self-employed individuals, have a ‘haircut’ applied to their total assessed income, with only 70% factored into the TDSR calculation.
- Certain financial assets, like rental income, are also subject to a ‘haircut’ when calculating TDSR.
Joint Borrowers and TDSR Calculation
- When multiple borrowers apply for a loan together, the TDSR calculation considers both borrowers’ aggregate gross monthly income.
- The debt obligations and income-weighted average age of borrowers are also considered to determine the loan tenure.
TDSR Vs. Mortgage Servicing Ratio (MSR)
- TDSR measures a borrower’s total debt obligations based on gross monthly income on the purchase of private properties and executive condominiums. At the same time, MSR is a specific criterion applicable to HDB flats when you have the intention to take HDB loan. However, a quick comparison between a HDB loan vs a bank loan can give you a better understanding which one suits you better.
- MSR limits the monthly mortgage payments for HDB flats to 30% of the borrower’s household income.
- Even if the TDSR allows a higher percentage of income for debt obligations (e.g., 55%), the MSR restricts the amount allocated to mortgage payments to 30% of household income.
- This means borrowers cannot allocate more than 30% of their household income towards the monthly repayment of an HDB flat, regardless of their overall debt burden.
TDSR Exemptions
- Owner-occupiers refinancing their property loans are exempted from the TDSR framework.
- Borrowers can refinance loan for investment property like Irwell Hill Residences beyond the TDSR limit by committing to a debt reduction plan and fulfilling the financial institution’s credit assessment.
- Mortgage equity withdrawal loans (MWLs) are not subject to the TDSR rules as long as the loan-to-value (LTV) ratio does not exceed 50% when combined with other loans secured on the same property.
- Financial institutions can grant property loans exceeding the 60% threshold for exceptional cases if documented, subjected to enhanced credit evaluation, implementing a debt reduction plan, and reporting to MAS.
How To Reduce Your TDSR?
- Exclude a co-borrower with excessive debt from the loan application. It reduces the overall debt obligations considered by the TDSR calculation, making it easier to meet the requirements.
- It is important to inform the bank about any additional income you receive through bonuses or commissions. The bank can consider this extra income when calculating your TDSR, which may improve your debt-to-income ratio.
- If you have substantially fixed deposits or share portfolios, you can present them to the bank as income-generating assets. This can boost your effective income and lower your TDSR.
- Inform the bank about any rental income you generate. Including rental income in the calculation can increase your effective income, potentially reducing your TDSR and improving your eligibility for a loan.
FAQs
1. Does TDSR Include CPF Payment?
The TDSR calculation does not include Central Provident Fund (CPF) payments made by the employer. Gross monthly income, for TDSR, refers to the borrower’s income before tax and excludes any contributions made to the CPF by the employer.
2. What Is the TDSR Rate For MAS?
The TDSR rate set by the Monetary Authority of Singapore (MAS) is 55%. This means the total monthly debt obligations, including the loan being applied for, should be at most 55% of the borrower’s gross monthly income.
Note that the TDSR rate applies to various loans and is a general guideline for responsible borrowing. However, specific loan products or institutions may have variations or additional criteria when assessing borrowers’ debt servicing capacity.
3. Can I Use TDSR For HDB?
No, loans from HDB are not subject to the TDSR rules. However, if you are applying for a loan from a financial institution to buy an HDB flat, the TDSR would be considered.
4. What Is the Difference Between TDSR And DSR?
TDSR is more restrictive than the DSR because it considers a broader range of loans. Unlike the DSR, the TDSR considers unsecured loans like credit card debt. If you already have a home loan, you can likely take on another loan without exceeding the 55% TDSR threshold. Also, the TDSR accounts for fluctuating interest rates on home loans.
5. Does TDSR Apply To EC?
The TDSR applies to executive condominiums (ECs) when purchasing them with a bank loan. It considers all your loan repayments, including outstanding non-mortgage loans. Therefore, buying an EC with a bank loan requires passing TDSR calculations.
Conclusion
Implementing the TDSR has proven effective in strengthening credit underwriting practices and promoting financial prudence. By considering all loan repayments, including unsecured debts, the TDSR ensures that borrowers are granted loans they can afford, reducing the risk of financial strain and defaults.
Moreover, it encourages borrowers to make informed decisions by carefully assessing the true budgetary impact of a mortgage. Overall, the TDSR has played a crucial role in enhancing the stability of the lending market and fostering responsible borrowing practices, benefiting both financial institutions and borrowers alike.
