Total Debt Servicing Ratio affect the loans of Singaporeans

As we explained earlier, the TDSR is the monthly loan installment permissible for an individual to spend. It is essentially a limitation to the monthly home loan installment that a person is allowed to pay. 

Having this limit prevents you from exhausting your finances on a loan payment while preventing the bank from forcing you to pay beyond your means. It’s a win-win situation. 

The current rate for TDSR in Singapore is capped at 55 % of your gross income. This one particular element is what decides your overall loan limit, which in turn, is determined by your monthly income and credit score, amongst other things. 

Let us delve into some important factors regarding TDRS measurement. 

The maximum TDSR depends on your monthly income and any debt paying obligations you may have each month. This includes pre-existing housing loan repayments, motor vehicle loans, student loans, mortgage equity withdrawal loans, residential property loans, credit card loans, etc. To put it simply, the more debts you have, the less TDSR you get, which results in a lower maximum home loan amount. 

But wait a minute, all this is applicable for someone with a fixed income, but what about those with variable income? Well, in that case, only 70 % of your assessable income will be considered for the TDSR. So a freelancer who earns $ 80,000 can only use 70 % ($ 56,000) for the assessment of TDSR. 

55% x 56,000/ 12 months = $ 2566 will go towards debt payment each month. This formula also applies to other income streams, such as rental income or combined income from eligible assets.

TDSR was introduced in Singapore in 2013 with the objective of establishing a responsible system for loans. To simply things, it was installed to ensure that banks lend responsibly only to those who can afford it and to inspire financial planning amongst borrowers. 

We can consider the limitations brought by TDSR as relief measures that help make loan repayment more practical and organised. Without it, people would fall prey to attractive home loan interests that sound too good to be true. However, as sole borrowers, applicants should not be swayed by desirable loan interest rate packages. Instead, they should be encouraged to use loan facilities wisely and cautiously. 

TDSR affects Singaporeans by limiting the amount they can borrow for property loans. This is done by making sure that borrowers only pay up to 55 % of their combined income. This makes it necessary to have an effective level of income to guarantee repayment of loan amounts. Failure to meet this standard will result in the lowering of the maximum loan amount allotted. 

Importance of TDSR for home buyers

Even since its introduction, TDSR has become a measuring framework for all financial institutions to assess the debt serviceability of borrowers. This framework aptly limits what people can borrow based on the 55 % mark. This means that a person’s monthly expenditure on debt repayments, such as loans, must not exceed this mark. Meanwhile, the loan tenure extensions are determined either by the borrower’s age; the younger the age, the more the tenure. 

Let us give you an example to show the impact of TDSR on loan applications for residential properties. 

Let’s say Mr A’s monthly income is $ 6000; the TDSR rate for this amount would be $ 3,300. His current monthly debt expenses are around $ 800, which leaves him $ 2500 to spare for the repayment of home loans. This means that the loan amount allowed for Mr A will depend on his ability to spend $ 2500 every month for repayment.  

Alternatively, HBD flats and Executive condo loans will be determined by the Mortgage servicing ratio, set at 30 %.

What if Mr A wishes to refinance his home loan for an investment property? In that case, he can opt for a debt reduction plan and pay 3 % of the outstanding balance in three years. 

Tricks You Didn’t Know about TDSR

1. Provide a 12-month payslip instead of 3 months if you have variable income. This prevents any instances of high income from being assessed and considered.
2. If you have a significant fixed deposit or share portfolio in your Central Depository Account (CDA), mention this to the mortgage banker. This could make the bank view you as a high-income candidate. 
3. Be sure to inform the banker of any rental income that you may be collecting on the side. 
4. Omit co-borrowers with a high level of debt. It is more reasonable to be a sole borrower than have a co-borrower who lowers your overall eligibility. 
5. Try to clear and pay off your pre-existing loans as much as you can before 12 months of the home loan application. 
6. Avoid taking on any new personal loans or credit card debts if it is two months or less for your home application date to arrive.

Variable income haircut 

Variable income, specifically the rental income, freelancers and self-employed who work for themselves, are subject to a 30% haircut . Being evaluated as riskier borrowers, only 70% of their total income is taken into account for TDSR

The Singapore government officially reduced the TDSR limit from 60 % to 55 %. This was probably triggered by the increase in the frequency of million-dollar HBD transactions back in 2021. Moreover, the overall household debt has grown to 6.8 % recently. Tightening the TDSR limit can effectively cool down these effects and balance things out eventually.

How TDSR Affects the amount You Can Borrow For Housing

TDSR can affect the total amount a person can borrow for their housing loan. This is done by setting a 55 % mark dedicated to paying the monthly home loan instalments. The amount we can spare monthly for mortgage repayment is directly related to how much we can borrow.

For example, let’s say that the amount a person can spare each month for repayment is $ 2000. So, if the person spends $ 2000 each month for the next 30 years, he can pay an amount of $ 720,000. 

Now, the bank can determine that the person can indeed repay a loan of $ 720,000 in the next 30 years if he keeps paying $ 2000 per month. Barring any hidden expenses, the bank should be able to lend him the loan amount confidently. 

Now let’s say the debt service ratio for loan repayment each month is $ 1300. It is impossible for the person to repay $ 720,000 in 30 years by spending only $ 1300 per month. So, in this case, the bank will consider him a risk and may not approve the loan unless the loan amount is significantly reduced. 

Impact of TDSR on your home loan application

As mentioned earlier, the TDSR directly impacts how your home loan application is structured. Generally, candidates who can afford the 55 % mark for monthly loan repayment will find more success in getting their loans approved. 

The very basis of whether or not someone gets the loan amount they need is totally dependent on their ability to allocate the 55 % in monthly instalments. 

Failure to meet the standard will promptly result in a loan rejection or a reduced loan amount. Although the loan may be approved, it might not be the amount the borrower initially wanted.

The total debt servicing ratio for a borrower can be calculated using the following formula. 

(Total monthly debt obligations/Gross monthly income)x 100% ≤ 55%.

≤ 55% implies that the TDSR should be less than or equal to 55 % to qualify for the loan. 

So, for example, let’s say the borrower’s fixed monthly income is $ 10,000. His monthly personal and credit card loan repayment comes to around $ 2500, and the mortgage bill comes to $ 3000. This means the monthly debt obligation he is liable to pay is $ 2500+$ 3000  = $ 5500 

Now we can use these figures and apply them to the TDSR formula. 

$ 5500 / $ 10,000 x 100 = 55 %

Here, the ratio equals 55 %, which makes the borrower eligible to receive the loan amount. 

It is important to note that monthly payable interest is calculated by applying medium-term interest rates. However, this rate should only be applied to loans secured by property under application, or property purchase loans. 

In some cases, the loan applicant may have a revolving loan. If the revolving loan is secured, the medium-term interest rate should be applied to the amount drawn. If the revolving loan is unsecured, then the minimum amount due from the borrower should be applied.

One of the latest changes to the TDSR includes a reduced rate of 55 % instead of the usual 60 %. This change is to take effect for new housing loans received after December 16, 2021. Let us look at an example to see how this has affected the loans of Singaporeans. 

Let’s say that the gross monthly income of a borrower is $ 12,000. 

If the loan was received during the old TDSR rate (12,000 x 60%), the monthly serviceable debt would be $ 7200. 

However, if we use the new TDSR rate (12,000 x 55%), the monthly serviceable debt comes to around $ 6600. 

As you can see, this reduces the overall burden of the borrower and considerably eases financial spending as a whole.

Another change is that borrowers can now include their eligible financial asset values in the gross monthly income. This is valid for stocks, gold, unit trusts, forcing currency, shares and debentures.