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Understanding TDSR in Singapore: Rules, Examples, and Tips

tdsr singapore
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Navigating the financial landscape of property acquisition in Singapore can often be complex and challenging. Among the crucial elements to understand is the Total Debt Servicing Ratio (TDSR) – a measure that ensures financial prudence and safeguards borrowers from biting off more than they can chew in terms of loans.

Instituted by the Monetary Authority of Singapore, the TDSR limits the amount of income that can be spent on repaying loans, setting a maximum threshold that is critical for potential borrowers to comprehend. In this guide, we will look into what TDSR is all about, offering a comprehensive look at its rules, and illustrating its implications through practical examples. Plus, we also curated a few tips to navigate its intricacies. 

Whether you are a first-time homebuyer or a seasoned property investor, this understanding will help you make informed financial decisions and achieve a balance between your dream home and a comfortable repayment scheme.

What Is the TDSR in Singapore?

The Total Debt Servicing Ratio (TDSR) is a framework instituted by the Monetary Authority of Singapore (MAS) that ensures individuals avoid overextending themselves with loans. TDSR refers to the percentage of a borrower’s gross monthly income that goes towards paying off their monthly debt obligations.

As such, the TDSR limits the amount that a person can spend on debt repayments. On 16 December 2021, the total debt servicing ratio (TDSR) threshold is set at a maximum of 55% of the borrower’s gross monthly income. This includes not only the loan under consideration, but all debt obligations such as housing loans, car loans, personal loans, student loans, credit card debts, and others.

For example, if a borrower has a gross monthly income of S$10,000, the total repayments of their debts should not exceed S$5,500 per month based on the TDSR guideline.

Why Does it Matter?

TDSR is placed to ensure that you, as a borrower, could repay your loans alongside the interest rate without any problems. It is also there to help financial institutions like moneylenders determine if you will not default on your personal or property loans.

What Are the Rules for TDSR?

The rules for Total Debt Servicing Ratio (TDSR) in Singapore are set by the Monetary Authority of Singapore (MAS) and apply to all loans applied on or after 29 June 2013.

  • TDSR Threshold: The TDSR for any property loan extended by a financial institution should not exceed 55% of a borrower’s gross monthly income. This means the total of all monthly debt repayments (which includes the loan being applied for, mortgages, car loans, personal loans, etc.) cannot exceed 55% of the borrower’s gross monthly income.
  •  Stress Test Interest Rate: When computing the TDSR for property loans, financial institutions don’t use the prevailing market rate. Instead, they use a “stress test” interest rate set by MAS. This process tests the ability of the borrower to handle any sudden rise in interest rates.
    • For residential properties, the minimum “stress test” interest rate is 3.5%.
    • For commercial properties, the bank or financial institution must use a stress test rate of 4.5%.
  • Gross Monthly Income: Financial Institutions are required to apply a minimum haircut of 30% to variable income and rental income.
  • Verification of Income and Debts: Financial institutions must use documented income and are required to verify a borrower’s debt obligations using information from the Credit Bureau Singapore.

Businessman removes wooden blocks with the word debt

What Is an Example of a TDSR?

Let’s assume you are applying for a home loan in Singapore and your monthly gross income is SGD 10,000. According to the TDSR framework, your total monthly debt obligations cannot exceed 60% of your gross monthly income.

Gross monthly income: SGD 10,000

Maximum TDSR (55% of monthly income): SGD 5,500

Now, let’s say you already have the following monthly debt repayments:

  • Car loan: SGD 1,000
  • Personal loan: SGD 500
  • Credit card bills: SGD 500

Your existing monthly repayments total SGD 2,000.

Subtracting this from your maximum allowable TDSR (SGD 5,500), you get SGD 3,500. This means you can potentially afford a home loan that requires monthly repayments of up to SGD 3,500, assuming all other conditions are met.

Remember that this is a simplified example and real-life scenarios can be more complex. Also, in the context of a home loan, the bank will use a “stress test” interest rate (3.5% for owner-occupied residential properties) rather than the actual interest rate to calculate the monthly repayments for the TDSR computation. This is to ensure borrowers can still afford the repayments if interest rates rise.

See also: Debt-to-Income Ratio and Personal Loan Mistake

What Is Calculated in TDSR?

In the TDSR calculation, the following items are included:

  • Gross Monthly Income: This includes a person’s stable monthly income from employment or self-employment. For variable income components (like bonuses or commissions), only 70% of the income is considered, due to its less predictable nature.
  • Existing Monthly Debt Obligations: This includes all existing debt repayments, such as home loans, car loans, student loans, personal loans, and credit card debts.

The TDSR is then calculated using the following formula:

TDSR = (Existing Monthly Debt Obligations + New Loan Repayment) / Gross Monthly Income * 100%

The resulting figure should not exceed 55%.

How To Keep Within the 55% TDSR

Planning to apply for a housing loan? You can take the following steps to ensure that you can keep your TDSR within the 55% threshold:

  • Pay off existing debts: You can pay off your existing debts such as car loans and credit card bills to reduce your overall monthly debt obligations.
  • Choose a property with a more manageable financial commitment: Consider adjusting your budget and pick a property that has a more manageable financial commitment to keep within the TDSR limit.
  • Increase their income: Another tip is to find ways you can increase your income. For instance, you can take on a part-time job or try negotiating for a higher salary to improve your TDSR
  • Avoid Taking on New Debt: New loans or credit cards can significantly increase your TDSR. Avoid these if you are planning on taking a property loan soon.
  • Consider Joint Borrowers: If you are married or buying the property with someone else, consider taking the loan jointly. This allows the income of all borrowers to be taken into account, potentially lowering the TDSR.

Closing

The goal of TDSR is not to impede your property aspirations but to promote prudent borrowing and long-term financial stability. It allows you to make informed decisions about borrowing, ensuring that you don’t overextend your financial commitments and maintain a healthy credit profile.

Key Takeaways

  • Total Debt Servicing Ratio (TDSR) refers to the percentage of a borrower’s gross monthly income that goes towards paying off their monthly debt obligations.
  • The TDSR for any property loan extended by a financial institution should not exceed 55% of a borrower’s gross monthly income. 
  • When calculating for your TDSR, banks and other financial institution will take into account your gross monthly income and your existing monthly obligations, such as such as home loans, car loans, student loans, personal loans, and credit card debts.

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