On June 2013, the Monetary Authority of Singapore (MAS) unveiled the new TDSR framework. The TDSR is the ratio to assess whether someone has the financial capability to take on a loan. It also encourages prudent borrowing by homebuyers and prudent lending by financial institutions (e.g. banks). See the full release here.
How to calculate TDSR?
TDSR is the ratio of A over B. Or A as a percentage of B. A is your total debt obligations. B is your gross monthly income. Your TDSR cannot exceed 60%.
Simply put, it is the percentage of a your average monthly income (before being reduced by taxes and deductions) that you have to pay for all of the following:
- Credit card balances
- Student loans
- Car loans
- Personal loans
- Credit term installment plans with retailers like Best Denki, and
- Home loan that you will be taking up
In short, if taking up the home loan will cause your TDSR to exceed 60%, you will not be granted the home loan. And, even if your TDSR is within 60% upon taking the home loan, you may also be restricted by the Mortgage Servicing Ratio.
Say, your gross monthly income is $4,000.
You have 60% of $4,000, or $2,400 to pay for the repayment of your home loan and all the loans you have. And, if you are buying a HDB flat or Executive Condominium, your mortgage servicing ratio is 30% (or $1,200). You cannot take up a loan that exceeds $1,200 repayment per month even if you will not exceed $2,400. The MSR does not apply to private property.
What if you exceed the TDSR?
- Reduce your debt obligations by paying off some loans.
- Reduce the amount you borrow for home loan. You can pay a higher downpayment.
- Find another longer term home loan. Being longer term means you usually pay less per month. (however, I really do not recommend this. It means you are paying more interest and getting sucked dry.)
- Ask the financial institution for an exemption, subjected to his approval.
Additional rules when calculating TDSR
- To calculate your home loan repayment per month, the financial institute will derive the interest rate on your home loan based on the medium-term interest rate or prevailing market interest rate, whichever is higher.
- If you have variable income (e.g. bonuses) or rental income, it may not contribute to your debt repayment ability as much as having a stable income.
- If you have eligible financial ssets, they will apply find its value, reduce it by an amount to account for the risk of the asset, and convert it into income stream, increasing your debt repayment ability.
Many people have complained that the TDSR is too restrictive. However, MAS recently came up with the TDSR exemption rules that allows you to refinance your loan at a lower interest rate.