Latest changes to the TDSR

In March 2017, the Singapore Government implemented a further series of property market cooling measures, which included some revisions to the TDSR framework as well. 

This included the non-application of the 60% TDSR threshold to mortgage equity withdrawal loans where the loan-to-value (LTV) ratio is 50% and below. 

Here, the LTV ratio is the ratio of the home loan to the current market value of the property. Equity withdrawal loans refer to loans where you borrow against the value of your private property to obtain cash, when your home loan has been paid down over the years. This revision, the Government noted, was aimed at helping home owners monetise their properties in their retirement years.

Then on July 6, 2018, LTV limits were tightened by 5% for all housing loans granted by financial institutions. Before the change, while individual borrowers could borrow up to 80%, or 60% if the loan tenure was more than 30 years or extends past age 65; now they can only borrow 75%, or 55% if the loan tenure is more than 30 years or extends past age 65.  

As a result of restricting the amount that buyers can borrow to buy property (especially from the second property onwards), these revisions have had a big impact on Singapore’s property market by bringing down the property demand, transaction volumes and prices in the past five years.

Related: 5 Reasons the TDSR Is Holding Back Singapore Accredited Investors (And What You Can Do About It)

How is TDSR calculated in Singapore? 

Do remember, TDSR is a permanent structural safeguard that all banks and financial institutions must follow when assessing housing loans, refinancing of housing loans, and loans secured by property.

This – maximum home loan you can apply for – is easily explained by the following example with numbers. 

Gross Monthly Income	S$10,000
Maximum monthly debt permissible (60% of gross income)	S$6,000
Current monthly debt repayments (e.g. personal loans, credit card bills)	S$2,000
Monthly income available for home loan payment	S$4,000

Mortgage Servicing Ratio (MSR)
If you are buying a HDB flat or an Executive Condominium (EC), you will be subjected to another ratio known as the Mortgage Servicing Ratio (MSR), which is set at 30% (half of TDSR’s 60% limit). Based on the example above, the maximum monthly home loan instalment permissible for an HDB/EC purchase due to MSR is S$3,000 (30% of gross income).

This in essence is how TDSR works. If the borrower cannot meet the requirements of TDSR, they have to either lower their home loan by making a bigger down-payment for the property purchase or consider buying a more affordable property.

Simply put, TDSR is calculated by dividing a borrower’s total monthly debt obligations by gross monthly income. Though an important consideration in this, is one’s variable income. 

‘Haircut’ in one’s variable income for calculating TDSR (70%)

Generally, a home loan applicant with variable income can only get 70% of the loan amount that an applicant with fixed income can, under the TDSR framework. This applies to freelancers, odd-job workers, self-employed, who are deemed riskier by lenders, 

For example, if a self-employed professional earns $50,000 a year, only 70% of the $50,000 = $35,000 is counted for TDSR and his/her TDSR would then be 60% x $35,000/12 months = $1,750 – as the amount that can go towards debt repayment. Whereas for a professional this sum would have been 60% x $50,000/12 months = $2,500. 

‘Haircut’ in rental income (70%) 

Similarly, do note that only 70% of rental income is counted towards TDSR. 

If someone earns a fixed income of $10,000 per month plus a rental income of $3,000 per month. For TDSR purposes, his variable income is subject to a 30 percent haircut (reduction in assets). His gross monthly income is $12,100 ($10,000 + $2,100). Therefore, the amount permissible towards debt repayment would be 60% x $12,100 = $7,260. 

In case of joint applicants 

If a husband-wife duo approaches a lender for a housing loan, TDSR will apply as in this example. 

Jeeny has a fixed income of $4,500 per month and debt repayments of $2,000. Her husband Tom’s gross monthly income is $5,000 and his debt repayments total $2,500. So TDSR will be $4,500/$9,500 = 47.3%

The total amount permissible towards debt repayment would be 60% x $9,500 = $5,700. Of this, they already are paying $4,500. Thus, the lenders can give them a further loan of up to $1,200 per month.

Another point to note in case of joint applicants is that under the TDSR framework, it’s harder to stretch the loan tenure. Previously, you could stretch your loan tenure by making a joint application with a younger borrower such as your son or daughter, and the lender would just consider the youngest one’s age as part of the lending criteria. But now, lenders use the average age of the borrowers, and include only those borrowers in the calculations who have an income. 

Variable interest rates for home loans

Most people take on home loans which are subject to changing or variable or floating interest rates. And to judge one’s capacity to take on debt, lenders have standardized these at 3.5% for residential properties, and 4.5% for commercial properties, which are called “stress test” rates. 

Under the TDSR framework, home buyers must maintain a TDSR of 60% at these stress test rates levels, which lowers the amount that can be borrowed, significantly. 

In a nutshell, even if you don’t have much debts, there’s a stress test limit beyond which you cannot borrow. 

Exceptions to TDSR in Singapore

In response to feedback from some borrowers who were unable to refinance their existing property loans owing to the application of the TDSR threshold of 60%, the Monetary Authority of Singapore (MAS) in 2016, announced the fine-tuning of the refinancing rules under the Total Debt Servicing Ratio (TDSR) framework giving borrowers more flexibility in managing their existing debt obligations. 

• Refinancing of owner-occupied housing loans: Earlier, for owner-occupied residential properties bought before the introduction of TDSR, a borrower may be exempted from the TDSR framework when he refinances his housing loan. Now this refinancing concession has been extended to all owner-occupied residential properties, including those bought after the introduction of TDSR. This adjustment recognises that all new housing loans would have been subjected to the TDSR framework at inception.

• Refinancing of investment property loans: Earlier, for properties that were purchased for investment before the introduction of TDSR, borrowers could have refinanced above the TDSR threshold of 60 per cent if they commit to debt reduction plans when refinancing their loans. From 2016, MAS has allowed a borrower to refinance his investment property loan above the TDSR threshold, regardless of when the property was purchased, if he meets the following two conditions: (a) commits to a debt reduction plan with his financial institution to repay at least 3% of the outstanding balance over a period of not more than three years; and (b) fulfils his financial institution’s credit assessment. 

How to improve TDSR in Singapore?

Now to the obvious question in everyone’s mind i.e. how to improve your TDSR in Singapore. 

There are two ways of doing this. 

Firstly, reduce your monthly loan commitments as soon as, and as far as possible. So, pay off any student or car loans, or credit card debts. This will also help you in saving on interest payments. 

Secondly, analyse your eligible financial assets such as Singapore dollar deposits, gold or stocks and shares, which may be converted to extra income streams by your bank, after the corresponding collateral “haircuts” (reduction in the value of the assets). This will not only boost your monthly income, but also bring down your TDSR.

Conclusion

To summarise, TSDR – as an instrument was introduced with a two-pronged approach. Firstly, to strengthen credit underwriting practices by financial institutions i.e. ensure loans are only issued to borrowers who can afford them; and secondly, to encourage financial prudence among borrowers i.e. help borrowers consider the true budgetary impact of a mortgage. And it has delivered on both the counts substantially, by all accounts.