What is TDSR?
Total Debt Servicing Ratio (TDSR) is a framework implemented by the Monetary Authority of Singapore to safeguard borrowers against over-borrowing for property purchases. Basically, it limits the amount individuals can spend on monthly mortgage debt repayment, based on a percentage of their gross monthly income. Currently, the highest TDSR that financial institutions can grant is capped at 60% of gross income. This means that you housing loan repayment, after adding all your repayment obligations (student loans, credit card debts, car loans and etc) cannot exceed 60% of your income.
TDSR vs DSR and MSR?
TDSR may seem similar to the terms Debt Servicing Ratio (DSR) and Mortgage Servicing Ratio (MSR). We will explain how they are different.
MSR only takes into account your housing loan repayments. So a MSR of 30% means 30% of your monthly income can go into home loan repayments, regardless of what your other repayment obligations are.
Then we have the old standard, DSR. TDSR is much more restrictive than DSR as DSR does not factor in certain unsecured loans such as credit card debt.
So… how does this affect me?
#1 Property Investing becomes harder
If you already have an outstanding home loan, it’s unlikely you can take on another one without exceeding the 60% TDSR.
#2 You can’t borrow as much even without other debts
Home loans are subject to fluctuating interest rates. Hence, when you decide on a home loan, the bank implements a “stress test” to check if you can handle sudden rise in interests. This means that home buyers must be able to maintain a TDSR of 60% or under, even if interest rates were to rise to a certain amount. This will in turn affect the loan quantum that can be borrowed even though you do not have any other debts.
Currently, the stress test is standardised at 3.5% for residential property and 4.5% for commercial properties.
#3 If you have variable income, you get to borrow less
With the rise of the gig economy, there are more self-employed individuals than before. How does the TDSR apply to a self-employed individual?
Under the new TDSR framework, commissions, rental income or other variable sums are grouped under variable income. And financial institutions are to treat that variable income as though it is 30% less than it actually is.
Example: As a self-employed individual, you make $6500 on average a month. However, when calculating your TDSR, your income is only considered to be $4550, which would result in you having a much lower loan quantum.
#4 More paperwork!
When TDSR was first introduced, there was a significant increase in paperwork required to get a home loan. Banks would require all your financial statements including credit cards debts, student loans and even your gym memberships! If you have variable income, you also need proof of the commission and fees you get from your clients!
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