The Total Debt Servicing Ratio (TDSR) is a method for the government of Singapore to keep the checks and balances for those getting a mortgage loan in Singapore. Risks might also post to allow people to have their own money management. Certain people might invest and save while others might spend till their last drop of their penny. This measure is one that will prevent the latter to happen.
What Will Be The Framework of The Total Debt Servicing Ratio (TDSR)?
This Total Debt Servicing Ratio (TDSR) framework ensures that purchasers of homes borrow as well as the financial institutions or bank lend responsibly. It is a regulation that is applicable to all mortgages that are granted by the financial institutions.
An estimation of 5 to 10% of Singapore citizens who are home loan borrowers were overstretched in 2013. The TDSR was introduced by the Monetary Authority of Singapore (MAS) to ensure that the financial institutions only issued loans to borrowers who are able to afford them and also help the borrowers to consider the impact of true budgetary of home loan. This framework also helps financial institutions to prevent issued loans that are of high risks.
The Total Debt Servicing Ratio also helps to curb speculation in the property market. Previously, people had borrowed huge amount of loan to purchase properties and hoping to make a profit by flipping. Due to the cooling measures, these days are long gone.
The Total Debt Servicing Ratio uses a threshold percentage of a borrower’s income to calculate how much the borrower can use to service the home loan. At this moment the threshold of the TDSR is 60%. This TDSR threshold is then subtracted by any loan obligations that the borrower has which will be the maximum amount that borrowers can spend on the repayment of their housing loan.
In a nutshell, the repayments for housing loan together with all the debt obligations must not be more than 60% of a borrower’s income. These debt obligations include:
- Car loans
- Student loans
- Loans which borrower is a guarantor
- Balances of credit cards (which include any installment plans)
For those who do not meet the requirement of the TDSR but have the money, there is an option for asset under management (AUM) which they can show their funds to the financial institutions for the shortfall and acquire the loan.
What Is the Difference Between the Total Debt Servicing Ratio (TDSR), the Mortgage Servicing Ratio (MSR) and the Debt Service Ratio (DSR)?
The TDSR might seem similar to the MSR and DSR but it is not.
The MSR takes account of only the repayments of the housing loan. A 30% MSR means that only 30% of the monthly income is the maximum amount that can use to service the repayment for the housing loan and does not take into consideration of any other debt obligation.
The DSR is the percentage of a borrower’s income that can be used for loan repayments. Typically, a lender will use 40% DSR to decide if a loan is granted in Singapore. This make it sounds that the DSR might be more stringent than TDSR but the truth it the opposite.
The DSR does not factor in some of the unsecured loans for example debt from the credit card. The TDSR is also more stringent as compared to the DSR. The formula for computing the monthly loan repayments and income are different which will be discussed shortly below. The array of debt obligation to be included in to the TDSR will be much wider.
It Will Be Harder to Borrow For Buyers Having High Outstanding Mortgage With TDSR
For those who have outstanding housing loans, it is likely they will be exceeding the 60% TDSR threshold if they are to take up another housing loan.
But then again, this will be depending on how much of their outstanding loans have left. The implementation of the TDSR is not really to prevent purchasers from buying but rather to ensure that the purchasers are buying within their means.
Stress Tests Using Higher Interest Rates
The interest rates of housing loans are always changing. The TDSR framework does not factor in the current interest rate for the computation. Rather the MAS has implemented “stress test” to ensure that borrowers will still be able to handle their loan repayment even the interest rates have sudden spikes.
The stress test standardization of the interest rate for residential properties is at 3.5% while the interest rate of commercial properties is at 4.5%.
That is to say that even if the interest rates are to spike to 3.5% (which currently is around 2%), home loan borrowers still must keep the 60% or lower TDSR. With this, it will affect the amount of the housing loan that can be borrowed significantly even though a borrower might have no debt outstanding.
Increase in Financing Risk
Majority of the housing loans offer low interest rate for the first 3 years then increase quite a fair bit on the fourth. It is not uncommon to see even an increase of 1%. During this time, most home owners will switch their housing to another package which offers interest rates that are lower.
When the TDSR was implement in 2013 June, those buyers who took up housing loans before the introduction of the TDSR were concerned with the increased in financing risk. They would not be able to do a refinancing on their housing loan is they were not be able to meet the requirements of the TDSR standard. This will mean that they will have to pay higher borrowing costs.
The MAS then tuned the requirement of the TDSR in February 2014 which allowed home buyers to have their housing loan refinanced if the existing loan was taken before the implementation of the TDSR even if they failed the TDSR requirement. That was only applicable for properties that are owner-occupied.
The MAS once tuned the requirement of the TDSR again in September 2016 which allow home owners to have their home loans refinanced in regardless when were the loan taken so long the property is owner occupied.
There Is a Further Cut for Variable Income
The threshold of the TDSR is 60% but what is the definition income? The income comprises of a few different types. The most common will be the salary but for salary income it also comprises of both fixed and variable. With the gig economy rising, there is getting more and more of individuals that are self-employed such as freelance writes, financial planners, business owners, etc. For variable incomes, there will be a “haircut” to 70% of the total income assessment for the TDSR requirement.
For instance, if an individual who is self-employed makes an income of $100,000 yearly, then 70% of the $100,000 which is $70,000 will be assessed. The TDSR threshold will be 60% of the $70,000 which is 60% x $70,000/12 months which is $3,500 per month. This means that only a maximum of $3,500 per month can be used for housing loan repayment.
For a professional with a fixed salary same amount which is $100,000 per annually, the TDSR threshold will be 60% x $100,000/12 months which is $5,000. This means that a maximum of $5,000 can be used on the housing loan repayment.
So, in a nutshell, a mortgage borrower having variable income will only get up to 70% of the amount that a borrower with a fixed salary of the same income level can based on the framework of the TDSR.
The rental income with also be another type that can be taken into consideration. However the rental income is also subjected to “haircut” which is the same as variable income with only 70% of it to be factored in.
The MAS also allows liquid assets such as structured deposits, deposits of foreign currency, gold, bonds, debentures, business trusts, unit trusts and stocks to be taken as part of assessment for monthly income. This means that a borrower just needs to show the financial institutions the proof on these assets to have them assessed to be a portion of income to get higher loan amount. The assessment of these assets will be subjected to “haircut” of 70% as well.
However, if the borrower decided to pledge these liquid assets to the financial institution for a specified time period (such as 4 years), there will be not “haircut” but most borrowers will not want to make this move.
Also Read: Loan Limit & Progressive Payment
No more stretching on the tenure of loan via age-roping
In addition, the MAS also need the tenure of the loan to be calculated based on all borrowers income-weighted age. Previously, a borrower could just stretch the loan tenure by roping in a borrower with younger age.
The lender will just calculated loan tenure based on the age of the youngest borrower. Example if a 60 year old borrower is taking a loan himself it will only be 5 years tenure. But if he brings in his son who is 30 years old, the lender will compute the loan tenure using the younger son’s age which will be 30 years on the loan tenure.
With the TDSR framework, the average among the borrowers will be taken in. For example, the collective age of a 30 years old borrower and a 60 years old borrower will be 45 years. The income-weighted age also takes into consideration of the income level of the borrowers.
With the father and son example above, if the father has a monthly fixed income of $10,000 and the son has a fixed monthly income of $5,000; their maximum loan tenure allowable will be 15 years if they are to take a maximum of 75% loan amount assuming that they do not have any outstanding mortgage loan. If the younger borrower has even lower income of no income, the loan tenure will be far shorter.
No More Guarantors
The TDSR framework no longer allows guarantors for any housing loan. There will be only joint borrowers. Before the implementation of the TDSR, this was a problem because a lot of borrowers depended on their guarantors’ income level to acquire their housing loan. With the use of guarantors, borrowers were able to secured housing loans with the maximum loan amount of 80% allowing home purchasing to be easy.
Executive Condominium (EC) and Housing and Development Board (HDB) flat buyers will be subjected to additional criteria
Other than the TDSR, purchasers of resale or new HDB flats and ECs who will be taking housing loans from financial institutions will also be assessed as well based a more restrictive criteria which is the Mortgage Servicing Ratio (MSR). The MSR denotes that only a maximum 30% of the monthly household income can only be used for the monthly repayments of home loans.
You May Want to Check Out Some of These ECs
For instance, if a borrower with 30 years of age with monthly fixed income of $10,000 and a monthly debt obligation of $1000, using the TDSR his maximum loan amount will be approximately $1,113,474. With the MSR, his maximum loan will be approximately $668,084. For financial institutions, they will be lending to this borrower based on the lower amount.
The TDSR framework does not cover refinancing unless the loan is for an investment property
As mentioned earlier, a lot of borrowers with owner-occupied properties who wished to have their housing loans refinanced to lower interest rates encountered roadblocks. The MAS then tweaked its rules in September 2016 for refinancing cases. This allows borrowers of owner occupied property to have their home loans from the exemption of the TDSR requirements when it comes to refinancing so long their credit assessments from the respective financial institution passes.
You May Want to Check Out Some of These New Condominiums
For housing loans that are meant for investment properties, the TDSR framework is still applicable for refinancing. However the borrowers of such housing loans may still able to refinance beyond the threshold of 60% TDSR if the following conditions are met:
- Commitment to the respective financial institution plan for debt reduction which is to repay a minimum 3% of the outstanding amount within a time frame of 3 years.
- Fulfillment of the credit assessment of the respective financial institution.
The MAS stated that this fine tune will offer the borrowers some flexibility to refinance the housing loans of their investment properties. It will also encourage them to get loans that are of right sizes in order to be less exposed to any increase in the increase rates or income loss in the future.
Borrowers Can Remortgage Their Paid-up Properties Not Exceeding 50% of Their Values Without The TDSR Limits
The government of Singapore had announced in March 2017 that TDSR framework will not be applicable when applying the mortgage equity withdrawal loan (MWL). These loans are whereby the owners of properties borrow monies against their properties’ paid-up value. So long that any outstanding amount of the mortgage and the MWL are not over 45% on the value of the property, the loan is permitted and the MWL is not considered as an extra debt obligation into TDSR. This exemption will benefit mainly homeowners who are retirees who wish to get their properties monetized.
Want to know how the TDSR affect your borrowing for an invest property? Want to ways to minimize your debt obligations and increase your loan limit? Contact us to find out more.