Singapore is currently considered one of the busiest financial capitals of Asia as all sorts of business and transactions occur around the country every day.
Since it is one of the region’s richest and busiest nations, it is very expensive to live in the country. However, Singapore offers a lot of financial solutions to help the public live comfortably in the country: from offering personal loans through financial institutions like moneylenders to affordable service fees and charges.
In order to ensure that these transactions and financial solutions are done properly, the Monetary Authority of Singapore (MAS) released an extensive and detailed framework that must be applied to all property loans offered in the country.
The framework is meant to consider the current status of borrowers who have outstanding debts in other loans while the process of processing property loans. All financial institutions in the country, including moneylenders, are tasked to follow this framework to ensure that proper credit underwriting practices are improved and to ensure that they improve their financial judgement
For personal loans, the total debt servicing ratio (TDSR) allows moneylenders and other financial institutions to determine the loan and its value.
TDSR also focuses on the following
- Determine the credit worthiness of potential borrowers by giving moneylenders a strong framework that bolsters their debt servicing capability.
- TDSR can be computed based on the total percentage of one’s monthly debts to their gross monthly income.
- TDSR ensures that there is no room for error as it is now a standard for all property loans, secured property loans and refinancing loans.
- Borrowers must present all relevant information that would highlight their debt obligations and their income so the TDSR can be computed.
- The Monetary Authority of Singapore stresses that borrowers should not have a TDSR that is over 60%.
In 2016, the MAS revised the TDSR to loosen the policies for current home loan borrowers and those with existing investment property loans so they will be able to refinance their mortgages and pay their loans easily.
For those with current property loans, they will be exempted from the 60% rule no matter when they purchased their home. For those with investment property loans, they will now be able to refinance their loans above the framework no matter when they purchased the property. However, they will need to abide by two conditions:
- They will agree to a debt reduction plan which would ask them to pay at least 3% of their current loan balance in the span of three years.
- They will also need to pass the bank or the moneylender’s credit assessment.
In order to compute the TDSR, you need to check the total monthly repayment for the loan being applied for by the borrower and their monthly repayments in all their other debts. Once you check the totals, add the medium-term interest rate. You should then add the 30% of all their eligible asset and income.
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.
TDSR also allows more people to apply for loans, especially joint borrowers, since the Monetary Authority of Singapore now ordered that a loan tenure must be computed based on the income of all the borrowers.
For example, if the joint borrowers are 30 and 50 years old, their income age average will be considered rather than their age itself. If one makes $10,000 while the other makes $5,000 per month, their income age average is 50, enabling them to take out a loan payable in 15 years if they will take out 80% loans for their property loan.
Previously, the borrower’s age is considered for joint loans. Based on the scenario above, 30 years would have been the max tenure permitted for the loan. Unfortunately, due to the short loan terms, repayments are more expensive. Loan terms cannot be stretched out as well if one of the borrowers is not working.
TDSR also removes the former requirement of having a guarantor to step in if you are planning to apply for property loans. With the framework, the guarantor will serve as a joint borrower and boost the chances of the property loan from being approved.
How to Reduce your TDSR
If you have experienced getting your loan applications denied because of the TSDR framework, there are ways you can reduce it before you apply for a loan again. Here are some tips to help you get started:
- Try paying all your dues on time for a year without any delays. Banks and moneylenders will check your history to determine if you should be trusted with a new loan.
- If you have any legal trouble because of your defaulted loans or bankruptcies, try holding off applying again after 5 years since if they see the bankruptcy or defaults are recent, they will not approve your application.
- Pay all your outstanding loans as much as possible unless you are open to accepting smaller loans. You should also consider applying for secured loans since the banks or moneylenders can hold the collateral as an insurance that you will pay your loans. If you do not, they can repossess the property to cover your dues.
- If you are going to work on your own or leaving your job, make sure to buy or refinance your property before you leave your employed job. Make sure to pay the taxes correctly and declare all your income.
- Make sure you check your credit history before applying. If there is a glitch, ask a mortgage consultant to help you with your loan application.
If you are planning to apply for a loan, it is important that you understand all the aspects that will be considered before your loan is approved. Before considering the finer points of applying for a loan, find out if your debts will be damper your application and find a way to fix it so your application will be successful.
Once you settle your debts and prepare the right documents, you will have no problems getting the loan that you need.