Home Loan Basics: Total Debt Servicing Ratio (TDSR)

If you currently own a home or are in the market for one, you’ve probably heard about this term called Total Debt Servicing Ratio, also known as TDSR. If you haven’t, it’s high time to get familiar with it because it’s used for all home loans and home loan refinancing.

To help you gain a better understanding of TDSR and its implications for a homeowner, we’ve dug into the details to provide an easily accessible, yet comprehensive, summary of this requirement. We’ll cover two other important requirements to take note of as you search for your ideal home loan too.

Read on to learn all about TDSR, what it means to your journey to purchase a home, and the calculation for this ratio works.

What Is the TDSR Requirement?

TDSR is a measure set by the Monetary Authority of Singapore (MAS) and used by banks to prevent individuals for taking out home loans they cannot afford to repay.

Specifically, the TDSR requirement aims to ensure that borrowers have sufficient income to repay all of their monthly debt obligations, including their home loan. The current TDSR for property loans is set at a maximum of 55% of the borrower’s monthly income.

Although there’s this requirement in place, banks and licensed money lenders still have the final say in deciding whether to approve a borrower’s property loan application. However, the MAS stresses that financial institutions should only do this on an “exceptional basis” and implement extra credit checks before approval.

The TDSR was implemented to ensure individuals in Singapore are mindful of how much they borrow from financial institutions here. Additionally, this aims to keep the property market in Singapore sustainable, which is paramount given the country’s small size.

How Do I Calculate My TDSR?

The TDSR formula is simple: Total Monthly Debt Obligations / Borrower’s Gross Monthly Income.

Monthly debt obligations include every monthly repayment owed:

1. Home loans (including those being applied for)
2. Car loans
3. Student loans
4. Renovation loans
5. Personal loans
6. Revolving loans
7. Credit card debt
8. Any other secured or unsecured loans

As for your gross monthly income, it’s simply your monthly income before tax, excluding CPF contributions.

Additionally, do note that banks are required to apply a “haircut” of 30% on variable (commissions, bonuses, etc.) and rental income. This means that folks earning a variable or rental income will have a slightly lower borrowing limit than their salaried counterparts with similar levels of monthly income.

That’s because variable and rental income aren’t stable. They can fluctuate from month to month or even cease entirely. From a bank’s perspective, a regular monthly salary from a registered business is much more stable and goes a longer way in ensuring the borrower can keep up with their monthly repayments.

Sample TDSR Calculations

To get a better idea of how much your monthly home loan instalment will cost, check out our free home loan calculator. This handy tool uses live rates to calculate the monthly repayment and total interest rate across a variety of home loan options for not only new and resale HDB flats, but private residences too.

How Is TDSR Different from the Loan-to-Value (LTV) Ratio and Mortgage Service Ratio (MSR)?

With all the ratios and acronyms related to purchasing a home, it can be difficult to know what each one means off the top of your head, let alone their significance.

In this section, we break down the differences between TDSR, the loan-to-value (LTV) ratio, and lastly, the mortgage service ratio (MSR).

Understanding the LTV Ratio

The LTV ratio dictates how much you can borrow based on the value of your asset, whether it’s a residential property or vehicle. As for the TDSR, it’s based on your monthly income and overall debt situation.

The higher your LTV limit, the more you can borrow and therefore, the less you’re required to pay upfront as down payment. Here’s how this looks like:

Although it’s definitely true that a lower LTV limit means you need to make a larger payment upfront, it can be a blessing in disguise. That’s because you end up paying less interest  in total as the loan you take on is relatively smaller.

If you’re wondering how to actually calculate the LTV ratio, it’s fairly simple:

LTV = (Loan Amount / Asset Price) x 100%

Therefore, if you’re borrowing S$250,000 to purchase a home which costs S$500,000, the LTV ratio is 50%.

Understanding the MSR

In contrast to the LTV and TDSR requirements, which apply to all home buyers, the MSR only applies to home loans for HDB flats and executive condominiums within their minimum occupation period.

The MSR is limited to a maximum of 30% of your gross monthly income and as its name suggests, is a percentage of your gross monthly income used for paying off all existing property loans, including the one you’re applying for.

It does not consider any other debt you have, such as renovation loans, car loans, or student loans.

Calculating your MSR is much more straightforward than the TDSR, with the formula being: Monthly Instalments For All Property Loans / Gross Monthly Income.

TDSR Applicability and Exemptions

Financial institutions are required to calculate your TDSR when you’re applying for a housing loan, any loan secured by properties, and mortgage loan refinancing.

Additionally, TDSR requirements are used for loans related to residential, commercial, and industrial properties. However, there are a few exemptions to the TDSR rules:

1. Owner-occupiers are not subject to TDSR rules when refinancing their home loan.
2. Individuals who want to refinance their investment property’s home loan may avoid the TDSR requirement if they commit to a debt reduction plan (repayment of at least 3% of the debt’s balance in less than three years) with their lender and if they meet the lender’s credit assessment.
3. Other exemptions include loans secured by a pool of collateral (less than 50% of the credit limit of the loan), bridging loans (with outstanding balance to be repaid within six months) and loans secured by properties with LTV ratios of under 50%.

Conclusion

The TDSR is a crucial requirement for prospective homeowners in Singapore. Preventing people from overborrowing is vital to reduce their chances of falling into a debt spiral. After all, home purchases are aspirational and they require large sums of money; a dangerous combination.

It’s easy for folks to get blinded by their dream home and end up wanting to borrow more than they can realistically repay. If the TDSR requirement isn’t in place, a good number of applicants would bite off more than they can chew, hoping their investments take off swiftly or that a new employment opportunity lands in their laps.

Fortunately, the TDSR is one of many guard rails in place. The LTV and MSR requirements also help to ensure that people in Singapore borrow prudently to finance their property purchase. Because is it really a dream home if you’re barely scraping by to repay your monthly instalment?

If you’ve calculated your TDSR, LTV, and MSR and are confident in applying for a home loan that’s within your means, you’ve come to the right place. We’ve compiled all the best home loans in one page, letting you compare each financial institution’s options at a glance.

Once you’re ready, you can submit a request to check their current interest rates and even read a full review of each home loan!

Read More:

• Should You Get a Fixed Home Loan or a Floating Home Loan?
• 3 Reasons Why You Might Need Mortgage Insurance
• Average Cost of Home Renovation in Singapore
• How to Determine the Value of Your HDB Flat
• How Much of Your Income Should You Spend on Housing?

Cover image source: Unsplash