Understanding TDSR in Singapore: How It Impacts Your Home Loan Eligibility

What is Total Debt Servicing Ratio (TDSR)?

The Total Debt Servicing Ratio (TDSR) is a regulatory framework that limits how much of an individual's monthly income can be spent on debt repayments, with the current TDSR cap set at 55%. This means that no more than 55% of your gross monthly income can be allocated to repaying all debts, including mortgages, car loans, and credit cards.

Introduced by MAS in 2013 and refined over time, TDSR aims to promote financial prudence and prevent borrowers from being over-leveraged. By ensuring that a significant portion of income remains untouched by debt obligations, TDSR helps borrowers sustain long-term financial health, even in challenging economic climates.

Why Was TDSR Introduced?

TDSR is more than just a debt cap; it’s a safeguard for both borrowers and Singapore’s financial system. Here’s why TDSR was implemented:

1. Prevent Over-Borrowing: Before TDSR, it was easier for borrowers to take on high levels of debt, leading to financial strain if they couldn’t meet repayments. TDSR restricts borrowing to manageable levels based on income, reducing the risk of default.

2. Curb Property Speculation: TDSR also discourages speculative property purchases by limiting how much investors can borrow, reducing the risk of a property bubble.

3. Enhance Financial Stability: TDSR minimizes systemic risk by ensuring individuals and the financial system can better withstand economic fluctuations and interest rate hikes.

How is TDSR Calculated?

TDSR is calculated by assessing all monthly debt obligations as a percentage of your gross monthly income. Here’s the formula:

Let’s break it down with an example.

• Monthly Income: $4,500

• 55% TDSR Cap: 55% of $4,500 = $2,475 maximum allowable for debt repayments

• Existing Debts: $800 car loan + $500 personal loan = $1,300 in monthly debt

• Remaining for Mortgage: $2,475 - $1,300 = $1,175 for a potential home loan

This means that with a monthly income of $4,500, the maximum you can allocate for all debts, including your home loan, is $2,475. If other loans reduce this amount, the remaining balance is what you can use for your mortgage repayments.

Factors That Affect Your TDSR Calculation

1. Variable Income Adjustment (Haircut): For individuals with variable incomes, such as self-employed individuals or those on commission-based income, only 70% of their income is considered for TDSR. This “haircut” reflects the additional risk associated with inconsistent income.

   Example: If your variable annual income is $70,000, only $49,000 (70% of $70,000) is considered. Your monthly TDSR cap would therefore be $2,245.83 ($49,000 x 55% / 12).

2. Existing Debt Obligations: All existing debt repayments, from credit card minimum payments to car loans, are counted within the TDSR cap. The more loans you have, the less you can borrow for property, as these debts reduce your remaining capacity under the TDSR.

3. Financial Assets and TDSR Exemptions: If you hold certain eligible assets (like cash, stocks, or unit trusts), you may be able to add their value to your gross monthly income. This can improve your borrowing power by increasing the income considered for TDSR purposes. However, approval depends on the bank’s policies.

Can You Increase Your TDSR Limit?

While TDSR’s 55% cap is firm, there are strategies you can use to increase the amount you can borrow:

1. Pay Off Existing Debt: Reducing or eliminating other debts increases the amount left within your TDSR for mortgage payments.

2. Leverage Financial Assets: Certain assets may qualify to boost your gross monthly income for TDSR calculations. Banks may consider assets like cash deposits, stocks, or unit trusts, which can increase your borrowing capacity.

3. Adjust Loan Tenure: Choosing a shorter loan tenure can improve your Loan-to-Value (LTV) eligibility but might increase monthly repayments, impacting your TDSR. Balance tenure and repayment amounts based on your financial standing.

Exemptions to TDSR

There are specific situations where TDSR does not apply, such as refinancing an existing mortgage for owner-occupied properties. When refinancing, TDSR may be waived under MAS Notice 632, provided the property is the borrower’s primary residence and certain conditions are met.

However, banks may still assess applicants using their own Debt-Income Ratios (DIR) to evaluate refinancing eligibility. This allows homeowners who might have previously been excluded by TDSR to manage their debt by taking advantage of lower interest rates.

TDSR vs. MSR: What’s the Difference?

While TDSR applies to all property loans, the Mortgage Servicing Ratio (MSR) is specific to HDB flats and Executive Condominiums (ECs) bought directly from developers. MSR limits housing loan repayments to 30% of gross monthly income and does not account for other debts.

For example:

• If your monthly income is $5,000, your MSR limit is $1,500 (30% of $5,000).

• If TDSR is also applicable, the lower limit between MSR and TDSR will apply.

This layered approach ensures HDB and EC buyers are protected from taking on overly burdensome mortgages that may become challenging to repay.

How Loan Tenure and Income Weighted Average Age (IWAA) Impact TDSR

Previously, some borrowers maximized loan tenure by applying with a younger co-borrower. MAS now uses Income Weighted Average Age (IWAA) to calculate the effective age of borrowers, balancing age with income contribution. Here’s how it works:

• Suppose three co-borrowers have varying ages and incomes.

  • Borrower 1: Age 30, Income $4,500

  • Borrower 2: Age 58, Income $7,800

  • Borrower 3: Age 45, Income $6,000

• Calculating IWAA results in a combined age of 47, determining the maximum loan tenure they can access.

For HDB purchases, the tenure is limited to 25 years, while private properties allow up to 30 years or until the borrowers’ age reaches 65—whichever is sooner. This change discourages leveraging a younger co-applicant to artificially extend loan tenure, promoting fairer and more sustainable borrowing.

Final Thoughts: Maximizing Your Borrowing Power Responsibly

TDSR is a powerful tool for ensuring that borrowers in Singapore maintain financial health and stability. By capping debt obligations at 55% of income, MAS protects individuals from over-leveraging and helps maintain a stable property market.

To make the most of TDSR:

• Manage Existing Debts: Reduce obligations to maximize borrowing power.

• Consider Fixed Income Sources: Stable income improves TDSR calculations, allowing greater loan eligibility.

• Explore Asset Inclusion: Check with banks to see if financial assets can bolster your TDSR-based income.

For Singaporeans looking to purchase or refinance property, understanding TDSR is essential. Visit HomeAsset.sg for more expert advice and resources on managing debt and maximizing your financial potential in Singapore’s property market.