Getting a home loan isn’t just about meeting the down payment; your income is also assessed. One of the main requirements is the Total Debt Servicing Ratio (TDSR) framework, which is imposed on banks by the Monetary Authority of Singapore (MAS).
In this article, we’ll talk about the impact that TDSR has on your home loan, as well the options you can take in case you can’t meet the TDSR requirements.
Your assessable monthly income determines how much you can borrow
When taking a home loan, your monthly loan repayments cannot exceed 60 per cent of your assessable monthly income, after factoring in your total debt obligations.
(By assessable, we mean a provable source of income; it must appear in your IRAS tax returns, business statements, or other documentation that the bank accepts).
For example, say you are purchasing a house as the sole borrower, and your monthly assessable income is $7,000. If you have no other debts, your TDSR is simply 60 per cent of $7,000, or $4,200.
This means your total home loan repayments cannot exceed $4,200 – this is your TDSR limit.
Besides income, having debt obligations affects your TDSR as well. For example, say you make $7,000 a month, but also pay $1,700 per month for various loans, such as personal loans or a past education loan.
Your TDSR limit would be 60 per cent of ($7,000 – $1,700 = $5,300), or $3,180.
(For loans with variable repayments, such credit card debt, the minimum monthly repayment is used when calculating your TDSR).
In addition to debt obligations, a 30 per cent haircut is applied to variable income sources
Rental income, income from businesses you own, or commissions all count as variable income. In general, you will count as having variable income if you’re self-employed (e.g. you are a consultant or contractor).
In such situations, your income will count as being 30 per cent less than the assessable median.
For example, say you are self-employed, and your median income (derived from your payslips, tax returns, or other acceptable sources to the bank) is $12,000 per month.
For the purposes of working out your TDSR, you would count as having an income of $8,400 per month.
You will often be given three simple solutions: make a bigger down payment, stretch out the loan tenure (thus reducing the monthly repayments), or simply buy a cheaper house.
But there are some other steps you can take:
1. Inform the bank of any bonuses or commissions you’ve earned
Many banks, when assessing your income, default to looking at three months of your payslips. However, this may not accurately reflect your financial situation. If you have earned any bonuses or commissions prior to the three months being assessed, for instance, the bank may be unaware of it.
You can highlight this to the bank, and provide 12 months of your payslips instead.
2. Use fixed deposits or share portfolios to raise your effective income level
If you have a fixed deposit with the bank, you can highlight this amount to the mortgage banker – the bank might consider you to effectively have a higher income level, if the deposit is sizeable enough.
The same can be done if you have a share portfolio in your Central Depository Account (CDA).
The exact amount by which this impacts your TDSR varies between banks; it is best to consult a mortgage broker to compare between banks (they can also help with the detailed paperwork this method requires).
3. Inform the bank of any rental income you earn
If you currently earn rental income on any of your properties, be sure to declare it to the banks. This can add to your income levels, for the purposes of determining your TDSR.
For your declared rental income to be valid, you must have an active Tenancy Agreement (TA), with at least six months’ tenancy from the date of your loan application. You must also have a valid stamp duty certificate from IRAS.
Note that, as mentioned above, rental income counts as variable income. This means the bank will consider only around 70 per cent of the rental income, when working out your TDSR.
4. Exclude a co-borrower who holds too much debt
If there is a co-borrower for the property, such as your spouse or a parent, consider who among you has the biggest debt obligations. If most of the debt is on your co-borrowers, it may be better to exclude them and be the sole borrower.
Besides these methods, it’s important to manage your monthly obligations to improve your TDSR numbers.
If you have substantial debts, it’s advisable to start aggressively paying them down, in the six to 12 months preceding your home loan application. The less you owe, the less likely you are to breach the TDSR limit.
A Financial Advisor can help you with regard to the various methods, such as debt consolidation, balance transfers, and so forth.
You should also note the following points:
There are some mistaken beliefs about how the TDSR works. Chief among these is the view that TDSR is somehow related to the value of your property. This stems from the belief that, if the property’s value exceeds the loan amount, the bank can easily sell it off to cover a default. Unfortunately, this is not how the system works.
Regardless of whether the property is valued at $2 million or $500,000, the bank will not grant you a loan if you don’t meet the TDSR.
Another misconception is that dividends from your stock portfolio can directly be added in your TDSR calculations.
To be clear, having a sizeable stock portfolio can effectively raise your income level for TDSR calculations (see above) – but this does not mean banks will simply add on the dividends as part of your income. Some banks will not consider the dividends to be part of your assessable income at all.
A final misconception is that TDSR is one of many temporary “cooling measures” used to lower property prices. In reality, TDSR is a structural change in the way home loans are handled in Singapore. Buyers should not expect MAS to change the rules anytime soon.
As such, it makes sense for any home buyer or property investor to familiarise themselves with the TDSR; doing so will help them improve the odds of a successful home loan application.
TDSR requirements do not just apply to a home loan, but they also apply to the following property related financing applications:
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