Thanks to numerous government
regulations intended to “cool” the housing market, buying a property in Singapore
is now a complex, frustrating and incredibly expensive process.
But of all the cooling measures
meant to stop housing prices from soaring, the one that causes home buyers the
most trouble is the Total Debt Servicing Ratio (TDSR) framework. In fact, TDSR
is the prime reason housing
prices are expected to fall up to 15% in 2015.
Of course, falling prices is a good
thing for prospective buyers – as long as the TDSR enables you to afford that
property you desire.
Here’s what you need to know about
TDSR if you’re planning on purchasing a private apartment, condominium or
landed property:
What is the TDSR framework?
It’s OK if you’re not familiar with
the specifics of the TDSR – according to a recent United Overseas Bank (UOB)
survey, 1 in 3 homebuyers in Singapore don’t understand it.
In short, the TDSR is an
affordability “ratio” that’s meant to prevent you from purchasing a property
that’s well beyond your financial means. It’s also meant to curb property
speculation so that Singapore doesn’t experience a subprime
meltdown.
The TDSR limits the amount of money
banks and other Financial Institutions (FIs) can lend you – which is 60% of
your gross monthly income minus all of your outstanding debts.
The outstanding debts that the TDSR
will take into account include:
- Credit
card balances (including “instalment plans” with retailers)
- Student
loans
- Personal
loans
- Car
loans
- Other
home loans (if applicable)
While being able to borrow up to
60% of your gross monthly income may sound like a lot, the reality is that most
of us carry outstanding debts that will affect how much we can borrow.
*Note on variable income: If you’re a variable income earner,
the TDSR framework requires you to take a 30% “haircut” on your average monthly
income. Variable income items such as bonuses or allowances can also be factored
in.
For example:
Fixed Income: If your gross monthly income
is S$10,000 and have no outstanding debts, your maximum TDSR limit is S$6,000.
But if you have monthly loan and
credit card obligations of S$2,000, your maximum TDSR limit will drop to
S$4,000 – meaning you can only afford a home loan with monthly repayments of up
to S$4,000.
Variable Income: If you have an “average” gross
monthly income of S$10,000, the TDSR will require you to take a 30% “haircut”,
meaning you’ll only be about to count S$7,000 as your gross monthly income.
That means your maximum TDSR limit is S$4,200 if you have no outstanding debt
obligations.
But if you have monthly loan and
credit card obligation of S$1,500, your maximum TDSR limit will drop to S$2,700
– meaning you can only afford a home loan with monthly repayments of up to
S$2,700.
How the TDSR affects your ability
to purchase property
When it comes to purchasing a
property, another item you must take into account is the “stress test,” which
is used to determine whether you can afford a rise in interest rates without
busting the 60% TDSR limit.
The stress test is an important
part of the TDSR’s goal of making sure you can survive paying higher mortgage
repayments as rates increase – which is timely considering that interest
rates are expected to rise this year.
Currently, the stress test interest
rates are 3.5% for residential properties and 4.5% for commercial properties.
The following chart illustrates how
TDSR will affect your new private property purchase
TDSR applies to all properties, but
if you’re intending to purchase a Housing Development Board (HDB) resale flat
or Executive Condominium (EC) – you’ll need to take into account something
called the MSR.
What if you want to purchase an HDB
resale flat or EC?
If you want to purchase an HDB
resale flat or EC, you’ll also have to deal with the Mortgage Servicing Ratio
(MSR) along with the TDSR.
The MSR limits the amount you can
borrow on the purchase of an HDB or EC to 30% of your gross monthly income. So
if you’re making S$8,000 a month, the most the MSR will allow you to pay on
your monthly mortgage repayments is S$2,400.
That means that even if you have no
outstanding debts and can borrow 60% of your gross monthly income under the
TDSR, if you want to buy an HDB flat, the most you can borrow is only 30% of
your gross monthly income.
How can you calculate TDSR on your
own?
Unless you have detailed knowledge
of Singapore’s latest housing regulation and the time and energy to do the math
required – finding out whether you can afford a property or not (and how much
you can afford) will be a challenge.
TDSR calculators available, but
some require you to pay a fee to use them. However, there are several free TDSR
calculators out there that can give you a good idea of how much you can borrow
and what your maximum loan tenor will be.
Here are some free TDSR calculators
you can check out:
While using a TDSR calculator will
give you an idea of how much you can borrow, you’ll still need help finding the
right home loan package.
Thankfully, you can find a home
loan with the best possible interest rate and receive free consultation through
our Home Loan Comparison Page.
On a final note, don’t forget to
purchase mortgage
insurance to cover your home loan repayments– because you never know
when retrenchment, disability or death will strike.
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