What Total Debt Servicing Ratio Does and How It Affects Your Personal Finances
by CashOctopus • October 7, 2019
The total debt servicing ratio was introduced in Singapore to rescue borrowers from the nightmare of taking on too much debt and committing their entire monthly income towards loan repayments. Basically, the TDSR is the maximum portion of your monthly income that you are allowed to commit towards your debt repayments including your mortgage repayment.
The percentage given for the total debt servicing ratio in Singapore is at a maximum of 60% of your monthly income. This means that the total figure of the amount that you should spend on making all your debt repayments such as credit card payments, personal loans, car loans and mortgage loans should not exceed 60% of your monthly income.
If you are not on a fixed monthly income, meaning you are self-employed, earning commissions, or a freelancer, then for purposes of calculating the total debt servicing ratio, your income will be taken as 70% of the average amount of income that you receive per month. For example, if you get an average of $6,000 per month as a freelancer, then the amount of your TDSR will be 60% of $4,200.
The total debt service ratio affects your property purchase in the following ways.
The total debt servicing ratio makes it more difficult to purchase property.
The total debt servicing ratio has made it more difficult to purchase property in Singapore. The main purpose is to prevent Singaporeans from taking on too many mortgages which can eventually become unmanageable. If you have several debts that you are servicing, then you may already have reached your total debt servicing ratio of 60% before applying for a home loan. This will hinder you from purchasing property until you pay off some of your other debts. The ultimate goal is that you should have debt that you can manage.
The amount you can borrow is limited.
Interest rates on property loans keep changing. It is possible for the interest rates to rise suddenly for a season of time. The amount calculated on your total debt service ratio should still be sufficient to cover the repayments of your debts even when the interest rates rise suddenly. This changing interest rate will prevent you from borrowing very large amounts of cash.
Those without a fixed income will borrow less amounts.
If you are self-employed or a freelancer, then you will not be able to borrow as much as those who have a fixed monthly income. This is because your total debt servicing ratio will be calculated on only 70% of your average monthly income.
You could find yourself in a situation where you would like to apply for a home loan but you do not meet the TDSR requirements. In this case, you can choose any of the following options.
- Make arrangements and efforts to clear most of your existing debt before you apply for a home loan. Once your total monthly debt repayments reduce, you will be able to determine the amount that you can borrow for property purchase. Paying off your debts may take some time but it will prevent you from getting into a situation where you are overwhelmed and unable to service your mortgage.
- You could also negotiate with the lender to get an exemption from TDSR rules. This is possible if you have evidence of ownership of other liquid assets which can quickly be converted into cash when the need arises. If you are able to get an exemption, then you can go ahead and apply for the loan on the basis of these liquid assets even though you may not have met the TDSR requirements.
Apart from the above information, there are other facts that should be noted about the total debt servicing ratio in Singapore. These are given below.
- Buyers of HDB flats and executive condominiums
If you are planning to buy an HDB flat or an executive condominium in Singapore, then the total debt servicing ratio will apply as well as the mortgage servicing ratio, which is 30%. This means that you will only be able to use 30% of your monthly income, on top of the 60% applied by the TDSR, to service your mortgage. The balance of the percentage can be allocated to the payment of other debts such as car loans, credit card payments and even personal loans. Consequently, owners of HDB flats and executive condominiums will be very limited in the amount that they are allowed to borrow.
- Rules of TDSR when refinancing
If you are a homeowner and you live in your home, then you will be able to refinance your home loan without being subjected to the total debt servicing ratio rules. You will also need to meet the requirements for credit assessment given by the financial institution. However, if you bought your home for investment purposes, then the TDSR will apply. It should also be noted that you can request for the TDSR percentage to be raised above 60% if you satisfy the following terms.
- You commit to pay a minimum of 3% of the outstanding balance in the next three years.
- The financial institution is satisfied that you have passed their credit assessment requirements.
- Remortgaging on your home value
If you are a retired homeowner and you want to borrow some cash against the paid-up value of your home, then it is possible for you to be exempted from the TDSR rules. The terms and conditions for this exemption are that the loan you are taking plus any outstanding amount on the mortgage should be below 45% of the value of the home. This arrangement is designed to give older homeowners the opportunity to get easier access to funds using their home value.
- Other assets that can be used
When calculating your monthly income for TDSR, other liquid assets that you may have such as stocks, foreign currency accounts, and even gold can be included. You will need to show proof of ownership of these assets, after which 70% of the total value will be included in your income figure when calculating your total debt servicing ratio. This will enable you to get access to a higher amount of funds when you apply for a home loan.