Decoding Real Estate
Total Debt Servicing Ratio (TDSR)
The TDSR was implemented on 28 June 2013 by the Monetary Authority of Singapore to prevent private property buyers from over-extending themselves and getting into excessive debt through risky financial behavior such as property speculation.
If you are intending to buy a private property such as a condominium, apartment or landed home, the TDSR limits your loan quantum such that all your monthly repayments for your debt obligations should not exceed 60% of your gross monthly income. Debts included in this 60% are:
- Mortgage loans
- Car loans
- Student loans
- Personal loans
- Renovation loans
- Credit facilities/installments from retailers
The TDSR also applies to the purchase of commercial properties.
Example:
Mr Tan earns $5000 a month
TDSR is 60% of $5000 = $3000
Car and personal loans = $1000
Monthly loan amount for private properties: $3000 – $1000 = $2000
Mortgage Servicing Ratio (MSR)
The MSR applies to HDB and Executive Condominiums (EC) purchases. The MSR ratio is 30%.
The MSR limits your loan quantum such that the repayment of your monthly mortgage loan should not exceed 30% of your monthly income.
That means that even if you have no outstanding debts and can borrow 60% of your gross monthly income under the TDSR, if you want to buy an HDB flat or EC, the most you can borrow is only 30% of your gross monthly income.
Example:
Mr Tan earns $5000 a month
MSR is 30% of $5000 = $1500
Monthly loan amount for HDB/EC properties: $1500
What Constitutes Gross Monthly Income?
- If you have a fixed income, it is 100% of your monthly income.
- If you have a variable income (such as commission, bonus, overtime pay), only 70% is considered. There is a 30% ‘haircut’ factored in.
- Financial assets such as fixed deposit that are pledged with the bank for 4 years
Below is an example of how the TDSR works:
What If You Need A Higher TDSR to Afford Your Desired Property?
There are a few ways to increase your 60% ratio:
- Reduce your debt: Pay off some of your debts so that you can free up your monthly income for repayment of your home loan
- Lower the loan quantum that you borrow and pay a higher down payment instead
- Ask the bank for an exemption. This will be reviewed on a case-by-case basis
For homeowners with existing property loans who need to refinance their properties, the MAS has made some exemptions to the TDSR.
What if You are a Joint Borrower with Your Wife?
When you purchase a property with another party, the Income Weighted Average Age formula kicks in for the calculation of the loan tenure. It affects joint applicants for a loan and gives a gauge of their combined ability to repay it. It is calculated by taking the average age of the borrows, weighted by their respective gross income.
Conclusion
If your salary consists of a variable component such as bonuses and overtime pay, the calculations will be more complex as these variables are subject to a 30% haircut even though your monthly salary isn’t.
To get a more detailed understanding of how TDSR works, what gross monthly income and variable income entails, what the “stress test” interest rate is, or how joint loan application affects you, reach out to our Property Science Consultants for a no-obligation chat.
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