Understanding the Total Debt Servicing Ratio (TDSR)

Understanding the Total Debt Servicing Ratio (TDSR)
Moneylender

The total debt servicing ratio or TDSR is the maximum threshold for property loans. Usually, you are only allowed to dedicate up to 60 percent of your gross monthly income to debt repayments. And you have to remember that the TDSR is not a temporary cooling measure. It is a permanent structural reform followed by all types of financial institutions and banks when assessing property loans.

TDSR is set by the Monetary Authority of Singapore (MAS) as a means of ensuring that only those capable of repaying their loans get approved. It not only filters the individuals that can apply for the loan but also makes sure that banks lend responsibly. This concept applies to housing loans, refinancing of housing loans, and loans secured by the property.

 

How is TDSR calculated?

You can compute for yourself an estimate of your TDSR, following the formula published by the Monetary Authority of Singapore on their website (listed below). This way, even before you work towards fulfilling your property loan requirements, you ensure that you qualify in the first place. 

Note that some financial institutions might adopt other (more conservative) practices that still fit the MAS regulations, so your computations might not be always accurate.

TDSR =  (Total monthly debt obligations of borrower / Gross monthly income of borrower) x 100

To give you a clearer picture of how the formula works in different income situations, you can study the following examples closely:

1. For fixed-income:

Say you earn a fixed monthly income of SGD 15,000, and you are repaying a monthly installment for a car loan while having an active credit line that amounts to SGD 3,000 per month. Your TDSR is computed as:

(3,000 / 15,000) x 100= 20%

Since you are usually allowed to spend up to 60% of your gross monthly income on debt repayments, you still have the remaining 40% free. Thus, your application for a property loan will most likely get approved as long as the monthly repayments do not exceed 40% (about SGD 6,000 from the above example) of your income. 

2. For variable-income:

Say you earn a fixed monthly income of SGD 5,000. And, you have a small business running that earns about SGD 4,000 per month which is subject to a 25% haircut. Also, you are repaying a monthly installment for a student loan while having an active credit line that amounts to SGD 2, 500 per month. Your TDSR is computed as:

[2,500 / (5,000 + (4,000 x 0.75))] x 100 = 31.25%

Since you are usually allowed to spend up to 60% of your gross monthly income on debt repayments, you still have the remaining 28.75% free. Thus, your application for a property loan will most likely get approved as long as the monthly repayments do not exceed 28.75% (about SGD 2,300 from the above example) of your income.

3. For joint applications:

Say you earn a fixed monthly income of SGD 7,500, while your partner earns SGD 2,500. Now the both of you have active credit lines, on top of you repaying a car loan. Your monthly debt installment totals to about SGD 3,000, while your partner pays SGD 1,000 for his credit card. Your TDSR is computed as:

[(3,000 + 1,000) / (7,500 + 2,500) x 100 = 40%

Since you are usually allowed to spend up to 60% of your gross monthly income on debt repayments, you and your partner still have the remaining 20% free. Thus, your application for a property loan will most likely get approved as long as the monthly repayments do not exceed 20% (about SGD 2,000 from the above example) of your combined income.

 

TDSR vs LTV & MSR

There are three ratios and acronyms related to getting a property loan that you have to master. One of them is TDSR, but how does it differ from the other two? The below definitions with a brief example for each helps clarify:

1. Loan-to-value (LTV) ratio

Limits the possible loan amount of an individual based on the value of their assets. The higher this ratio is, the more you are allowed to borrow with a lower required downpayment. 

Say you got a home loan amounting to SGD 300,000. After a year, you decided to sell the property and get another loan, with the market value of your house at SGD 500,000. Your LTV is computed as:

(Loan Amount / Asset Price) x 100 = (300,000 / 500,000) x 100= 60%

2. Mortgage Servicing Ratio (MSR)

On the other hand, MSR refers to the ratio of your monthly property loan repayment to your gross monthly income. In contrast to TDSR, it only considers your installments for property loans. It restricts your loan amount based on income but does not consider ALL your debts. Also, it only applies to HDB flat or Executive Condominium (purchased directly from the developer) buyers.

Say you need to pay monthly property loan installments of SGD 1,500. And, you earn SGD 20,000 a month. Your MSR if you apply for an HDB flat is computed as:

(Property Loan Installments / Monthly Income) x 100= (1,500 / 20,000) x 100 = 7.5%*

*MSR is usually capped at 30%, so for this example, your application most likely will get approved.

Additional note: You have to pass all three ratio requirements to purchase an HDB flat.

 

TDSR Applicability & Exemptions

Now, the question is to whom does TDSR apply for? Also, is there a means to avoid it to get a higher amount for your loans? Below are the applicability and exemptions that you can work towards to get a favorable value for your property loans:

TDSR Applies to:

  • All loans for property purchase
  • Loans secured by a property
  • Refinancing of the above-mentioned loans

Exemptions:

  • Owner-occupier seeking to refinance their loan
  • Borrowers committed to a debt reduction plan (at least 3% repayment within 3 years of debt balance) looking to refinance their loans
  • Loans secured from a collateral pool (less than 50% of the loan credit limit)
  • Bridging loans with an outstanding balance due within 6 months
  • Loans with LTVs below 50% that are secured by the property

 

Closing

If you do not meet the TDSR threshold, then your property loan application will most likely not get approved. 

The TDSR, therefore, may sound highly limiting, basically preventing those on the lower-income bracket from getting a property of their own. But, you should look at it as a safety net of some sort that ensures you only buy within your means. 

It is an intricate framework established to ensure that no Singapore citizen is overspending their income on debt repayments. That way, fewer homeowners are barely scraping by because of bad property investment decisions.