If you’ve once tried to get a lender’s mortgage quote, you’ve encountered the term total debt servicing ratio (TDSR). It’s alright to feel horrified or confused after encountering TDSR along with other unfamiliar technical mortgage terms. Your lender’s representative must willingly explain and give you examples to clarify the term.
However, if you have yet to apply for a mortgage and are doing research, you’ll want to know TDSR’s goals and effects. Doing this helps you adapt to its possible impact on your mortgage terms and budgets. The government established TDSR to ensure Singaporean lenders and borrowers have protection against high-risk parties and deep debt.
Total Debt Servicing Ratio: Protects Lenders and Borrowers
Singapore’s banks have a license to advertise and market their products and services aggressively. An unsuspecting borrower will love that they can conveniently borrow money and pay later, giving them hundreds of thousands of available spending options.
However, bank advertising practices encourage wasteful and destructive spending leading Singaporean borrowers into deep debt. On the other hand, actuaries and accountants won’t be happy with hundreds of defaulting borrowers.
Therefore, the total debt servicing ratio aims to protect both lenders and borrowers from high-risk and expensive situations that incur losses on both sides. Borrowers can only spend 60% of their income on debt repayments. A Singaporean paying 40% of their income to mortgages and other essential financings, such as education, will see automatic mortgage or co-guarantor disqualifications thanks to TDSR.
TDSR affects the following financial products/assessments:
- Housing Loans
- Housing Loan Refinancing
- Loans With The Property Acting as Collateral
TDSR’s Effects on a Normal Borrower
The total debt servicing ratio isn’t an obstacle. Instead, it’s a safeguard that guarantees any Singaporean borrower has a chance to pay all their debts. However, a huge cut of 40-50% of a borrower’s income unavailable for financing makes mortgage applications — and even regular loan applications — much more challenging than before.
However, TDSR guarantees you’ll have the following positive effects:
You Can Afford Your Financing
Property loans aren’t the most affordable bank financial products available. However, borrowers paying 90% of their income to property loans will never have a chance to recover financially and fully pay their debts. With TDSR, you can always afford your financing with proper budgeting and income stability.
Bank actuaries and accountants take great pains to calculate your actual risk value. TDSR plays a great role in their assessments and, it sets the precedent of higher incomes getting better approval rates. It protects borrowers from encountering extremely deep debt due to insufficient income.
Consider a Mortgage’s Budget Impact
Aggressive bank advertising and marketing are possible because TDSR and other lender-borrower safeguards exist. If all advertising were true, hundreds of thousands of Singaporeans would default on their debt obligations. TDSR forces Singaporeans to take a second look at their gross monthly income and possible future mortgage payments.
With TDSR, banks can determine a borrower’s paying capacity while accounting for all risk profiles. Property loans aren’t fixed-value payments forever, especially after five years once it ties itself to SIBOR, SOR, and other value-affecting factors.
Helps Lenders Assess a Borrower’s True Risk Value
Actuaries and accountants calculate a borrower’s risk value using credit scores and relevant market assessments. Credit scores determine the borrower’s financial aptitude and responsibility. However, a borrower’s job in a particular industry and their dependents play a huge factor in risk value calculations.
With TDSR, experts can assess a borrower’s true risk profile because they have tangible income rather than probabilities and market activity as useful decision-making data. Having a borrower who will spend less than 60% of their total income gives lenders full confidence that the latter can repay everything. Once actuaries add the borrower’s financial aptitude and job stability, they have the latter’s best assessment.
TDSR Types and Examples
Here are the three TDSR Types and some calculations to give you an idea about their effects on your loan applications.
Most borrowers will find themselves in this category.
You’re a borrower earning S $10,000 fixed monthly income. Combining all your credit card, education loan, and other debts, you make S $4,500 in total regular monthly payments.
To calculate for TDSR = total regular monthly payments/gross monthly income
TDSR = S $4,500/ S $10,000
TDSR = 45%
The 60% value of S $10,000 is S $6,000. Therefore, you only have S $1,500 to spend on additional financing unless you have finished paying your education loan and reduce your credit card bills.
Under the new rules, all variable incomes are subject to a 30% “haircut.” If you’re earning a fixed income of S $7,000 + S $3,000 from your rental property income, your total income is:
Income = Fixed Income + Variable Income – 30% Haircut
Income = S $7000 + S $3,000 – (S $3000 x 0.30)
Income = S $10,000 – S $900
Income = S $9,100
You are paying S $4,500 in debt once again. Using the same formula for TDSR, we can derive the following figure:
TDSR = total regular monthly payments/gross monthly income
TDSR = S $4,500/S $9,100
TDSR = 49%
The 60% value of S $9,100 is S $5,460. Therefore, you only have S $960 to pay for any new financing and aren’t in the best position to have a huge-amount loan application due to your TDSR.
Calculating TDSR for joint applications is as straightforward as possible. You add your and your partners’ income and debt together. Then, you calculate it using the same equation for fixed-income TDSR.
For example, you earn about S $2,500 monthly, and your spouse earns S5,000. You have debt payments amounting to S $1,000 regularly, and your spouse has to pay S $3,000 monthly.
Total JA Income = S $7,500
Total JA Debt Repayments = S $4,000
TDSR = Total JA Debt Repayments/ Total JA Income
TDSR = 54%
TDSR’s Direct Effects on Financing
With TDSR’s introduction to protect both lenders and borrowers, each observes the following aspects in every loan transaction.
- Low-Risk Loan-To-Value (LTV) Ratio: From an 80% on any property, banks will automatically assume a 30% LTV, which helps lower borrower risk and increase approval
- Stress Test Interest Rates: Banks will “test” you with a starting interest rate. However, certain mortgage promotions might bypass this but indicate additional requirements to ensure strict borrower filtering
- Loan Tenure Rules: Some banks only appoint a maximum of 35 years payable mortgages, which is still generous to borrowers.
- Guarantors and borrowers are similar concepts in every mortgage contract.
TDSR Exemptions You’ll Want to Know
In some situations, TDSR’s risk-reducing capabilities can become an obstacle. The Singapore government recognizes this problem because they’ve established numerous TDSR exemptions. These help TDSR from becoming hassles to qualified borrowers in special cases, such as the following.
Owner-occupiers looking to refinance their properties have TDSR exemptions. However, these parties should be careful with taking on an additional loan. The TDSR focused on ensuring anyone spending more than 60% of their income does not get into deep debt, and this exemption is highly likely due to the collateral’s presence.
Refinancing Investment Property Loans
Suppose a borrower has an investment property loan and is willing to go through a debt reduction plan with their respective financial institution. In that case, Singapore’s government may exempt the borrower from TDSR. Usually, the debt reduction plan involves paying 3% of the remaining balance within three years.
Mortgage Equity Withdrawal Loans
Using the to-be-purchased property as collateral upon applying for mortgage equity withdrawal loans gives the borrower TDSR exemptions. However, the government disallows any TDSR borrower exemptions if the loan LTV exceeds 50% due to the higher risk for both borrowers and lenders.
TDSR and Property Upgrades
Owner-occupiers planning to sell their current property to move to an HDB flat or other properties can have TDSR exemptions if they fulfill the following requirements:
- Owner-occupiers sell their existing property
- They have no other properties
- They have no other property loans
- They meet their FI’s credit requirements.
Other Exempted Cases
Any situation that meets the following situations can merit TDSR exemptions:
- The lender duly notes the exceptional reasons in their written and signed statement
- The lender approves credit evaluation enhancement
- The lender is implementing a debt reduction plan with borrowers
- MAS has duly noted the case.
If You Have Low Credit Scores, You Can Use Alternatives!
TDSR is both a safeguard and an obstacle for many borrowers. However, for borrowers with poor credit, it’s impossible to land a good loan despite having excellent TDSR because of their credit scores.
Fortunately, Fortune Credit’s personal loan do not require high credit scores as a requirement. If you have low credit scores disabling you from using banking products, you can always find help from dependable licensed moneylenders in Singapore.
Both personal and bridging loans provide you up to six times your monthly income, which is virtually enough for any mortgage and other financings you might need. Inquire with Fortune Credit today to learn more about the best licensed moneylender products you can use.