What does the TDSR do?
Total Debt Servicing Ratio, also known as TDSR, is a system for the government of Singapore to keep controls on the borrowing activities of Singaporeans. If their debts are not monitored and controlled, people have a tendency to spend their loaned money on unnecessary things.
The TDSR system makes certain that borrowers are not overleveraged borrowing more than they can afford to pay. It is applicable to every home loan that you can apply for in Singapore.
The establishment of TDSR Singapore
Back in 2013, it was reported that about 5 – 10% of mortgage holders in Singapore have taken loans that are more than they can pay.
As such, the TDSR was implemented by the Monetary Authority of Singapore (MAS) in June 2013 as a response, which aims to stop Singaporeans from over-stretching their paying capacity by applying for many loans to fund their home acquisitions.
An additional reason for the establishment of the TDSR is to control property price speculation. Before the introduction of TDSR, people are making a profit by borrowing a lot of money to purchase a property and flipping it. Such price speculation is gone nowadays due to the cooling procedures introduced by TDSR.
One of the things that TDSR does that affects your home loan is by computing the proportion of your gross monthly income that is allowed to go into your loan.
Currently, a financial institution is only allowed to have 60% of your gross income.
That indicates that your property loan monthly payments, cannot go higher than 60% of your income after including all of your other financial obligations like vehicle loans, student loans, and other loans you might have.
How to calculate the debt servicing ratio TDSR?
According to the Monetary Authority of Singapore (MAS), the formula for TDSR is as follows:
(Borrower’s total monthly debt obligations / Borrower’s gross monthly income) x 100%
The borrower’s total monthly debt obligation includes vehicle loans, student loans, personal loans, and other loans, whether secured or unsecured.
How Does the TDSR Affect Property Loans?
Investing in real estate properties will be much harderIf you currently have an existing home loan on your name, it will be hard to get another property without going over the 60% Total Debt Servicing Ratio restriction. As such, acquiring new real estate properties either for investment or for personal use will be much harder.Needless to say, it is not impossible to acquire new properties even if you already have an existing loan or two. If your previous loans only have low monthly repayments, it is possible to add more loans without breaking the 60% limitation set by TDSR.After all, the reason for TDSR is not to prevent you from buying more properties, but to prevent you from overleveraging with your home loans. You will not be limited to getting property loans if you can afford them.
Higher financial riskThe majority of interest rates of home loans offered by banks in Singapore are only minimal for the first three years. In the fourth year, be prepared for potential increases, as your interest rate can see an increase of up to 1 percent.When borrowers reached this point in their loan repayment, it is common practice to opt for a different home loan deal that features a cheaper rate of interest.
What happens when you have no fixed income? (e.g. freelancers, business owners, etc)The Total Debt Servicing Ratio only allows 60% of your income to be used for paying your home loans. What does this mean for people with no defined amount of “gross monthly income” such as people working in the gig economy, self-employed, and freelancers? What will be the basis for people that are not receiving a fixed monthly income every month?We have the answer for you. In case you have a shifting revenue, you need to put it with less borrowing amounts that you can get. Within the new TDSR system, income from commissions, freelance work, and self-employment are categorized within variable revenue. Financial institutions are mandated to address variable income as if it’s 30% lower than the actual amount.To illustrate, imagine that you are a freelancer earning an average of S$10,000 a month. When calculating your TDSR, financial institutions will first deduct 30% from that amount, setting your gross monthly income from S$10,000 to S$7,000.After that, they will calculate the 60% TDSR rate based on the reduced amount. This will mean that people with no fixed monthly income will have to put up with reduced home loan amounts compared to people with a fixed monthly income.
It is more difficult to extend the loan periodBefore the introduction of the Total Debt Servicing Ratio, it is possible to extend the tenure of the loan by doing a joint loan application using a younger person as a co-borrower. Back then, financial institutions will simply calculate the maximum allowed loan tenure using the age of the youngest loan co-borrower.It is no longer possible to obtain a longer loan tenure using the method described above after TDSR was enforced. Now, they are required to get the average age of all the co-borrowers. This means that if you use a 20 years old co-borrower and you are 40 years old, the collective age that will be used in your loan tenure calculation is 30.Furthermore, financial institutions will only accept people with an income as a co-borrower, which means that the time of people using their children who are earning nothing as co-borrower just to gain more loan tenure is over.
Be prepared for the gruesome paperworkThe introduction of the TDSR also introduced a lot of grueling paperwork for the home loan application process. You will be required to submit all of your financial statements to the financial institution that you are applying for a loan, and when we said all, we meant all statements.From credit card statements, student loans, vehicle loans, subscriptions, and even personal loans are required to be submitted. If you have variable income, you will also be required to submit proof of it, like invoices from clients, proof of rent collection, proof of commissions, etc.All of this combined can result in lengthy paperwork that you will have to confront before you can take out a home loan.
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