What home buyers need to know about Total Debt Servicing Ratio (TDSR 60%) and Mortgage Servicing Ration (MSR 30%)

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:

• UOB TSDR calculator
• ERA Real Estate TDSR calculator

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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