Getting a home loan in Singapore is not 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).
TDSR is an important term a homeowner or a prospective homebuyer must be familiar with, given that all banks and financial institutions must take this into account when assessing home loans, refinancing home loans, or securing loans by property
In this article, we will talk about what is TDSR as well the options you can take in case you cannot meet the TDSR requirements.
TDSR, which stands for Total Debt Servicing Ratio, basically calculates the percentage of your income that can go into servicing your loan. The TDSR is currently capped at 55% of your gross monthly income. This means your housing loan repayments, after adding all your monthly debts, cannot exceed 55% of your gross monthly income.
TSDR was introduced in Singapore so that homebuyers do not borrow more than they can afford. The rationale behind implementing TDSR was to safeguard borrowers from over-leveraging. It aimed to ensure that borrowers have enough income to repay all of their monthly debts, including home mortgages.
The TDSR framework encourages prudent borrowing by households and strengthens credit underwriting standards by lenders. Please note that TDSR applies to public and private property loans granted by all banking and non-banking financial institutions.
A borrower’s TDSR is computed by simply dividing the total monthly debt obligations by the gross monthly income.
(Monthly total debt obligations / Gross monthly income) x 100% < 55%
Please note that when calculating your TDSR, banks don’t just use the current rate but implement a “stress test” to make sure you could maintain a standard TDSR of 55% or under, even if the interest rates rise above 3.5% for residential properties and 4.5% for commercial properties.
MAS imposed an additional criterion on the home loan limit that applies only to loans for HDB flats and Executive Condominiums (EC), known as mortgage servicing ratio (MSR).
Under the MSR framework, the monthly mortgage repayments for HDB flat or EC must be limited to 30% of the gross monthly household income of the borrower.
How much home loan you can afford is regulated by the loan-to-value ratio, also known as LTV. It tells the maximum amount of mortgage loan a bank can loan you as a percentage of the property’s purchase price or value or, whichever is lower.
If it is your first property, you are allowed to borrow 75% of the LTV limit for loan tenure of 30 years or less up to age 65 and 45% LTV if the loan tenure is more than 30 years or the loan extends past the age of 65.
TDSR is used mainly to calculate the loan serviceability of borrowers for a mortgage taken up to finance a private or HDB property. Since TDSR takes into consideration all of your debt obligations, you should aim at “cleaning up” all (or max. possible) your existing instalments, loans and credit card balances when planning a property purchase.
Additionally, TDSR also is used as an effective debt management tool in two following ways:
Currently, the TDSR is set at 55% of the gross monthly income of the borrower. This means the total monthly debts should be less than or equal to 55% of gross monthly income to get a home loan approval. Typically, if your monthly income is low, then your maximum monthly repayment limit is likely to be low as well.
Please note that the total monthly debt obligations (TDRS numerator) include all outstanding loans, not just home loans. The outstanding monthly debt obligations such as car loans, renovation loans, student loans, credit card bills, property loans including the loan being applied for, and any other secured or unsecured loans.
Banks and financial institutions will confirm these debt obligations by checking with Credit Bureau Singapore and collecting related documents from the borrower.
On the other hand, the gross monthly income used in the computation of TDSR may vary depending on the borrower’s occupation and can even be enhanced by showing other income sources and certain eligible financial assets. It generally refers to your monthly income before tax, excluding any CPF contribution made by the employer.
An employee’s salary can have a combination of a fixed salary (transportation allowances, shift allowances, etc.) and a variable income (bonuses, sales commissions, overtime pay, etc.).
Banks and financial institutions would use the latest IRAS NOA (Income Tax Notice of Assessment) and monthly payslips to determine the fixed and variable income components.
Gross Monthly Income = Monthly Fixed Salary + (Annual employment income as per NOA – (Monthly Fixed Salary x 12)) x 0.70 / 12)
The financial institution recognises the fixed salary components at 100% of the stated amounts, however, a 30% ‘haircut’ is applied to variable income components.
For self-employed individuals and full commission earners, the IRAS NOA of the past 2 years is required and the gross monthly income is computed as such:
Gross Monthly Income = (Trade income as per NOA / 12) x 70%
Therefore, self-employed, odd-job workers, and freelancers can only get 70% of their total assessed income counted towards the TDSR.
For example, if you are a freelancer earning $4,500 per month, only 70% of total income (= $3,150) will be counted towards TDSR. The TDSR would then be 60% of $3,150, which equals $1,890. This means only $1,890 a month can go towards all debt repayments including the mortgage repayments.
Variable income includes rental income, commissions, bonuses and allowances, and income from businesses you own.
Rental income must be verified with a copy of the IRAS stamp certificate and a tenancy agreement with atleast 6 months of lease remaining.
In the past, many investors in Singapore tried to borrow with co-borrowers, such as spouses, siblings, etc., especially a younger co-borrower, because the lenders used to take the average age of borrowers into account to compute the loan tenure.
Previously, older applicants (e.g. 55 years old) earning substantially more (e.g. $12,000 per month) could get a higher loan tenure by roping in their younger children (e.g. 23 years old) earning significantly less (e.g. $3,000) to lower the starting age from 55 down to 39 (average age of 55 and 23) or sometimes even 23 (age of youngest borrower). However, this is no longer the case.
The Monetary Authority of Singapore(MAS) now takes the average income weighted age (IWAA) of co-borrowers into account instead of considering the average age of the borrowers or the age of the youngest borrower to compute the maximum loan tenure.
The concept of an income-weighted average age (IWAA) of both borrowers is now used when calculating maximum loan tenure. This makes it harder to stretch a loan tenure.
The formula to determine IWAA for you and any joint borrowers is:
[(Age of Borrower 1 x Gross Income of Borrower 1) + (Age of Borrower 2 x Gross Income of Borrower 2)] / Total Gross Income
Please note that a proportionately heavier weighting is essentially given to the age of the higher income earner and vice versa. Based on the income weighted age, the maximum loan tenure can then be determined.
As per the new restrictions, the options for co-borrowers are also limited as the co-borrowers’ debts are being taken into account and all the co-borrowers must be income earners.
So, what can you do? Try looking beyond their age and income; instead of looking for a younger co-borrower, it might be better to find a co-borrower with a lower debt load.
If your co-borrower is deeply in debt, they are likely causing you to go beyond the TDSR threshold.
When offering a home loan, banks and financial institutions should make sure that mortgagors are within the thresholds for total debt servicing ratio and mortgage servicing ratio. While TDSR and MSR are usually mentioned together, homebuyers must be aware of the key differences between the two.
Let’s assume your debt obligations per month add up to only 20% of your monthly income. While the allowable TDSR limit is 55%, you can humbly pledge the remaining 35% of your monthly income towards your HDB or EC loan every month.
You must fulfil the MSR criterion that allows a borrower to pay off no more than 30% of their household income followed by TDSR calculations.
Here’s an example for you to better understand how these two – MSR and TDSR – play a role in getting you a home loan.
Mike, a young 25 years old man, earns a fixed monthly salary of $6,000 and is looking to buy an EC. He also has a monthly repayment of $1,200 for a car loan and is looking for a mortgage of around $500,000.
At a stress rate of 3.50%, the indicative monthly instalments on the desired mortgage amount is $2,000.
MSR (first criteria) = Fixed monthly income of $6,000 x 30%, equals to $1,800.
So, Mike’s loan eligibility capping is $1,800 per month which means his total monthly debt obligations ($2,000 + $1,200) exceed the MSR ratio.
Now, let’s calculate Mike’s TDSR.
TDSR = Fixed monthly income of $6,000 x 60%, makes it $3,600.
Under the TDSR framework, Mike’s monthly repayment for all debt obligations cannot exceed $3,600.
Here’s the total outstanding debt obligations:
$1,200 (car loan) + $2,000 (EMI for desired mortgage amount) = $3,200
Fortunately, Mike passed the TDSR criterion but not the MSR, which is a must to get his bank loan for a newly launched EC or any HDB property. Therefore, Mike can consider either going for a lower loan amount or buying a private condo instead of an EC.
Well, whether you like it or not, this is what every borrower in Singapore must follow when considering a bank loan for a HDB flat or EC.
Let’s take a look at a quick comparison between TDSR and MSR.
|Definition||The amount spent on mortgage repayments and other monthly debt obligations must be below 55% of a borrower’s gross monthly income when buying any public or private property.||The amount spent on monthly mortgage repayments only must be 30% or under a borrower’s gross monthly income when buying HDB flats or ECs.|
|Housing loans applicable||All public & private properties||HDB flats & ECs bought from a developer directly|
|Calculation formula (in %)||(Monthly debt repayments + Home loan repayments)/(Gross monthly income) x 100%||(Home loan repayments / Gross monthly income) x 100%|
|Other things to note||Considers ALL your loan repayments, including outstanding non-mortgage loans.||Does not take into account other loans you might have.|
You will often be given 2 simple solutions: make a bigger down payment or stretch out the loan tenure (thus reducing the monthly repayments).
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 is important to manage your monthly obligations to improve your TDSR numbers.
There are a few exemptions to the TDSR rules in Singapore for certain categories of borrowers and circumstances.
These exemptions to the TDSR framework are issued by the government of Singapore for borrowers with existing loans exceeding 55% of their gross monthly income.
The TDSR limits do not apply to an existing borrower looking to refinance his/her owner-occupied residential properties.
Implemented by the MAS, this provision essentially helps homeowners to get a lower interest rate in repaying the loan for the home they live in.
In other words, the owner-occupiers are not bound as tightly by the TDSR framework when refinancing the loan for their property.
Please note that individuals who do not meet the above requirement or might want to refinance their investment property’s loan beyond the TDSR limit can consider applying for a debt-reduction plan with their lender to manage debt at the time of refinancing.
The debt-reduction plan comprises repayment of at least 3% of the debt balance in not more than three years. However, the borrower must fulfil the particular lender’s credit assessment too.
The TDSR framework also includes provision for banks to grant property loans exceeding 55% threshold provided these conditions are met:
If you have substantial debts, it is 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 do not 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:
if you are unsure whether or not to try and increase the TDSR limits or if you need any help through the process – you can get in touch with a professional mortgage consultant at DollarBack Mortgage for a non-obligatory consultation.
DollarBack Mortgage is an independent mortgage broker in Singapore with partnerships with all major banks. Get the lowest housing loan rates in Singapore and enjoy cash rewards!
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