If you've been thinking of buying a home for investment purposes, you'll want to consider Singapore's TDSR housing policy before you take that leap.
While home buying is an option of long-term investment, it's a big step and purchase decision so you'll want to cover all your bases with research as you would with any big decision.
One of the most important considerations is finding out what your Total Debt Servicing Ratio (TDSR) is.
Not sure what this is? Don't worry, we've got you covered with what you need to know about the policy. You'll want to know how it could affect you before taking out a home loan.
What is TDSR?
The Total Debt Servicing Ratio (TDSR) is a housing loan policy which was first introduced by the Singaporean government in 2013.
The reason it was introduced was to ensure homebuyers were borrowing within their means and to prevent them from taking out too many loans that they cannot service, which would lead them to fall into unhealthy debt. It was also a cooling measure for the rising property prices.
The TDSR essentially limits the amount any Singaporean can borrow from a bank. According to the policy, an individual can only take out a loan where his aggregate monthly repayments is not more than 60% of his monthly income.
It takes into account all types of loans owed to a bank including car loans, student loans, personal loans, credit cards, and of course, mortgages.
How does TDSR work?
The TDSR, unlike previous policies to curb over-borrowing, is strictly enforced by the government and applies to both individuals and banks.
The 60% ratio is adopted by banks in their application process. If you apply for a loan and taking the loan would mean that your total monthly repayments exceed 60% of your monthly income, the loan will be rejected.
Let's say you're currently servicing the following loans on a monthly basis with a salary of $5000 per month:
- Car loan – $800
- Personal loan – $300
- Renovation loan – $600
- Credit card instalment plans – $400
Your current debts stand at $2,100 per month, which means that you can only take up another loan not exceeding $900 in monthly repayment (60% totals $3,000 in this case).
But, how do banks keep track of your various loans?
This involves the Credit Bureau of Singapore (CBS) which holds and consolidates all credit information of every Singaporean citizen. Using information about all your loans and credit behaviour, it generates a Credit Report for each individual.
This Credit Report then informs other lenders and financial institutions about your creditworthiness and financial standing. Similarly, banks refer to CBS to determine whether to approve or reject a loan, including your mortgage.
| See also: Credit scores: What are they and how do they work? |
Things you need to know about TDSR as a homebuyer
1. A 30% 'haircut' on all variable income
If you have income which fluctuates month to month, this will be subjected to a 30% 'haircut'. For example, if your variable income is $5,000 a month, then they'll first take 30% of that which means $3,500. From that, your TDSR will be up to 60% of that, which is $2,100.
This gives you less room to take on another loan, because your 60% cap will be significantly reduced.
2. Mortgage Servicing Ratio
If it's a HDB resale flat or Executive Condominium that you're eyeing, you'll need to consider your Mortgage Servicing Ratio (MSR) in addition to the TDSR.
The MSR is the limit of what you can spend on a mortgage based on your monthly income, which is set at 30%. So if your monthly income is set at $5000, the amount you can spend on your mortgage every month is capped at S$1500.
Between the TDSR and Mortgage Servicing Ratio, whichever capped amount is lower is the amount you'll be allowed to spend on your mortgage.
3. Exemption for owner-occupants
If you're an owner-occupant who is refinancing a home loan, the TDSR will not apply to you. That is to say, borrowers who have purchased the property for their own stay are exempted; the TDSR only applies to Singaporeans looking to buy properties for investment purposes.
4. No more guarantors
With the TDSR policy, there are no longer guarantors for property loans. Prior to this, home loan applicants could secure a loan based off a guarantor's salary.
This made it easier to get a home loan regardless of an applicant's salary or debt-to-income ratio, which also means that the borrower was more likely to accumulate debt in the long run.
Now, applicants can instead apply for home loans with a joint borrower, who is equally responsible for the repayment of the loan. The TDSR is then calculated based on the aggregate monthly income of both parties. That is to say, the amount that you can borrow will thus be higher with a joint borrower.
5. Exemptions to TDSR
All that said, there are ways to get around the TDSR rules. If you're looking to invest in property, you could consider trying the following steps:
- You could commit to a debt reduction plan with your bank and commit to reducing your debt and the outstanding amount owed
- You pass a bank's credit assessment
Knowing what you now know about the TDSR policy, you may still be keen to invest in property. And if you are, it always helps to find the most flexible and low-interest loan possible to keep your long term debt ratio low.
To start searching for the best home loans out there, GoBear's here to help! Compare your best options out there with our handy comparison tool.
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