TheHouseSale.Info

The one stop portal for all your Singapore property info

Total Debt Servicing Ratio (TDSR) and How It Affects Your Loans

Highlights of new TDSR measures effective 29 June 2013

 

1. Consider monthly repayments of new loan and all other debts.

2. Applies to property loans for Singapore & overseas residential/non-residential properties,

    to individuals or entities set up  solely to purchase property;

3. Total debt servicing ratio (TDSR) is capped at 60%.

4. Calculate new loan repayments using min 3.5% for residential property loans;

5. All borrowers to be mortgagors (OTP on or after 29 Jun 13);

6. Guarantors to be co-borrowers;

7. For joint borrowings, the income-weighted average age of borrowers to be used;

8. Haircut of at least 30% on variable income & rental; and

9. Haircut on the value of financial assets if used in calculating income.

It’s always a risk letting people manage their own money. Some will save and invest, others will spend their last borrowed cent gold plating the family chihuahua. And the government seems convinced we’re the latter, because Singaporean borrowers now face TDSR:

 

What? You mean I can only get a loan for the balcony now?

What? You mean I can only get a loan for the balcony now?

 

What Is The TDSR Framework?

The Total Debt Servicing Ratio (TDSR) framework is to ensure borrowers aren’t overleveraged (i.e. borrowing like a broke alcoholic in a liquor store). It’s a standard that applies to property loans granted by all financial institutions (FIs)*.

*FIs are not always banks.

TDSR calculates the percentage of your income that can go into servicing your loan. At present, the highest TDSR that FIs are meant to allow is 60%.

That means your housing loan repayments, after adding all your repayment obligations (student loans, credit card debts, car loans, personal loans, etc.), cannot exceed 60% of your income.

 

 How Is It Different from DSR and MSR? 

You may know the terms Debt Servicing Ratio (DSR) and Mortgage Servicing Ratio (MSR), which seem similar to TDSR. They’re not.

MSR only takes into account your housing loan repayments. So a MSR of 30% means 30% of your monthly income can go into home loan repayments, regardless of what your other repayment obligations are.

Then we have the old standard, DSR. And this is where a lot of you will yell (1) “But DSR already factored in all my debts”, and (2)“Wait a second, 60% TDSR is even more relaxed than the old 50% DSR”.

Wrong on both counts.

(1) DSR didn’t factor in certain unsecured loans, such as credit card debt, and

(2) TDSR is more restrictive than DSR. The method for determining your monthly income and loan repayments are different, as we’ll describe below. Also, the range of debts factored into TDSR are much wider.

There’s more to it than that. I’ll explain these effects as we go along:

  • Property Investing Becomes a Lot Harder
  • You Can’t Borrow as Much, Even Without Other Debts
  • Increased Refinancing Risk
  • If You Have Variable Income, You’ll Have to Borrow Less
  • It’s Harder to Stretch the Loan Tenure
  • Take Up Zen Meditation Before Attempting the Paperwork

1. Property Investing Becomes a Lot Harder 

If you already have an outstanding home loan (or two), it’s unlikely you can take on another without breaking the 60% TDSR.

Of course, it depends on how high your outstanding home loans are. The point is not so much to prevent you buying (although that’s a partial goal), but to ensure you buy only within your means. We will be exploring other property investment avenues soon, so follow us on Facebook to stay tuned!

 

5891621929_d1880728f1_n

That hard earned loose change collection may come in handy now. Or… not.

 

2. You Can’t Borrow as Much, Even Without Other Debts 

Home loans are subject to changing interest rates. So when you take such a loan, the bank doesn’t just use the current rate; they implement a “stress test”, to see if you can handle sudden spikes in interest.

This “stress test” is now standardized at 3.5% for residential properties, and 4.5% for commercial properties.

In other words, home buyers must maintain a TDSR of 60% or under, even if interest rates were to rise to 3.5% (currently, it hovers around 1.7%).

This significantly affects the loan quantum (i.e. the total amount that can be borrowed), even if there’s no outstanding debts.

 

3. Increased Financing Risk

This is the risk that you won’t be able to refinance into a cheaper loan.

Most home loan interest rates are low for three years, and then go bonkers on the fourth. It’s not impossible to see hikes of one full percent.

At this point, it is (or was) standard practice to switch to another home loan package, with a lower interest rate.

The problem is, a lot of home buyers took their loan packages before the TDSR framework. It was easier to get bigger loans back then.

Should they try to refinance now, they might find they don’t meet the 60% TDSR. These unfortunate people are stuck with their overpriced home loans.

 

4. If You Have Variable Income, You’ll Have to Borrow Less 

 

“Sorry but I think we’re going to have to classify ‘good looks’ under Variable Income.”

 

Okay, so TDSR is 60% of your income. But how do you define that income? Not everyone gets a fixed paycheck.

A businessman takes out variable sums from his business, landlords get rent, and salesmen have commissions.

Under the new TDSR framework, that’s lumped under variable income. And FIs are to treat that variable income as though it’s 30% less than it actually is.

So if you’re a business owner making $5,000 a month, your income when calculating your TDSR is just $3,500. That, in turn, means a much lower loan quantum.

 

5. It’s Harder to Stretch the Loan Tenure 

Previously, you could stretch your loan tenure by making a joint application with a younger borrower (say, your son).

FIs would just use the age of the youngest applicant. That helped, because a 25 year old can get a 30 year loan tenure, which a 55 year old obviously can’t.

But now, the average age of the borrowers will be used; so a 25 year old and a 55 year old would count as having the collective age of 40.

Also, FIs will only count borrowers with an income. So you can’t be earning nothing, but list yourself as a co-borrower with mum or dad to lower the average age.

 

6. Take Up Zen Meditation Before Attempting the Paperwork 

 

199190303_4f90d8a539_m

Am I applying for a loan for stacks of paper or for my house?!?

 

What statements do the banks need now? All the statements.

Credit card debts, commissions, student loans, gym memberships, the personal loan you took out to buy a decent Magic deck, all of it. And if you have variable income, you need documentary proof of rent you collect, commissions, fees from clients, etc.

This causes severe complications (e.g. if your clients are in arrears but have collateral, do their fees still count toward your variable income? What about credit cards, if you purposely just pay $50 and not $500 a month?)

Expect interaction with the banks to feel like a marathon Ping Pong tournament from now on.

The Monetary Authority of Singapore (MAS) introduced the Total Debt Servicing Ratio (TDSR) framework for all property loans granted by financial institutions (FIs), with effect from 29 June 2013

Computations of the TDSR affects properties that are residential or non-residential, owned individuals or companies, new applications or re-financed loans, and in or outside Singapore. Declaration and calculation of incomes and loans are also now very detailed.

TDSR may be a new term, with explanations in the FAQs of the TDSR unnecessarily long and difficult to read, but they are only additional sub-clauses to address the loopholes of the Loan-to-Value (LTV) limits announced in the previous property cooling measures.

It is also nothing new to see the government once again adopting a “reactive intervention” approach – dispatch general guidelines to the market, then await speculators to circumvent the loopholes, before sending more stringent rules in for the kill.

What are the killers?

There are four major “killers” in the TDSR framework:

1) 60% threshold

Total debt obligations cannot exceed 60% of total income.

2) 30% haircut

There is an arbitrary 30% cut of all variable and rental income, and 30% to 70% cut for the value of eligible financial assets.

3) 3.5% or 4.5% interest rate

Calculate new loan repayments based on medium-term interest rate of 3.5% for residential properties and 4.5% for non-residential properties, or prevailing interest rate, whichever is higher.

4) Income-weighted average age

If a borrower can’t meet the TSDR threshold, the guarantor will be the co-borrower.

Use income-weighted average age of borrowers rather than younger borrower’s age to determine loan tenure.

Who are the targets?

It is clear that the TDSR is meant to target three main groups of property buyers:

1) Marginal Buyers

Buyers who are highly leveraged with property or non-property debts, and buyers whose affordability depends on low interest rates and betting that it won’t go up too fast too soon

2) Multiple Property Buyers

Buyers who are buying their second, third or more properties with high outstanding loans, and buyers who bought properties recently at a high price, with low rental returns.

Note: Once interest rates go up, owners of multiple properties may not be able to refinance or repackage to lower monthly repayment even for the loan of their own residence if they exceed the TDSR threshold.

3) Two generation buyers

Buyers hoping to benefit from a longer loan tenure by putting the loan under a younger joint applicant’s name, and multiple property buyers hoping to benefit from higher LTV with a joint applicant buying for the first time

Message to parents: it’s time we stopped loaning loans on the next generation.

Work that kills

1) Bonus or commission-based jobs

With a 30% cut on variable income, “salarymen” relying heavily on bonus or commission will be at a disadvantage. For instance, salespeople who have the majority or all of their income based on commissions, or senior executives who have a high proportion of their income based on bonuses.

2) Self-employed, unemployed and retirees

They have to declare all their eligible liquid assets or other assets, amortize the value over four years, and decide whether they will be pledged or not for four years.

3) Staff working in mortgage departments

FIs are required to compute the borrowers’ TDSR with a mountain of information:

- Monthly repayments of all property and non-property debt obligations;

- Gross, variable and rental income after haircut; and

- Eligible assets declared with or without pledge.

And all declarations and supporting documents have to be obtained from applicants and validated with relevant parties. Deviations are not allowed since all exceptions have to be granted by the FI’s board of directors and credit committee.

The 60% threshold is just a start to get FIs familiar with the computation of TDSR. The LTV limits are also not permanent. They are to be reviewed over time and revised at any time. That means all calculations are only temporary and may be required to redo all over again.

Imagine the tremendous amount of extra workload added on the housing mortgage department!

4) Housing loan applicants

Before the TDSR rule, housing loan applicants normally take one week to obtain an approval-in-principal. With the new computation of TDSR, applying for a housing loan is now a long and tedious process.

It is a toil to submit details and proof for all property and non-property debt obligations, variable income and eligible financial assets.

Should owners ask tenants to renew their lease well in advance to ensure that the tenancy agreement has a remaining rental period of at least six months?

Should non-property debt loans include, apart from car loans, renovation loans, student loans and credit card loans, all other purchases paid by installment like electrical appliances, overseas holidays, spa and beauty packages?

Last updated by Geoffery Ho Sep 14, 2013.

Badge

Loading…

Notes

Hdb to Pte avoid ABSD issue

Created by Geoffery Ho Feb 14, 2019 at 10:18pm. Last updated by Geoffery Ho Feb 14.

The Troubling Implications of Owning a 40-Year old HDB Flat

Created by Geoffery Ho Feb 14, 2019 at 9:21pm. Last updated by Geoffery Ho Feb 14.

HDB Industrial New Policies - 1st June 2015

Created by Geoffery Ho Jul 22, 2015 at 12:53pm. Last updated by Geoffery Ho Jul 22, 2015.

What you should know about ECs

Created by Geoffery Ho Oct 1, 2014 at 11:34am. Last updated by Geoffery Ho Oct 1, 2014.

8 Things You Should Know When Using CPF for Property

Created by Geoffery Ho Aug 19, 2014 at 9:32pm. Last updated by Geoffery Ho Aug 19, 2014.

Eligibility to Buy PTE or HDB

Created by Geoffery Ho Jun 6, 2011 at 7:03pm. Last updated by Geoffery Ho Aug 18, 2014.

Can Private Property Owners (Local or Overseas) buy HDB Flat (New or Resale)?

Created by Geoffery Ho Jun 3, 2014 at 9:21pm. Last updated by Geoffery Ho Jun 3, 2014.

CPF property rules: 4 things you may not know

Created by Geoffery Ho Aug 2, 2009 at 11:15pm. Last updated by Geoffery Ho May 8, 2014.

Thinking Of A Career With Us?

Created by Geoffery Ho Jun 29, 2009 at 10:54pm. Last updated by Geoffery Ho May 7, 2014.

HDB & PTE : Online e-Services & Utilities Application

Created by Geoffery Ho Oct 21, 2009 at 11:53pm. Last updated by Geoffery Ho Apr 13, 2014.

Progessive vs Deferrment Payment Charts

Created by Geoffery Ho Feb 8, 2014 at 1:38am. Last updated by Geoffery Ho Feb 8, 2014.

Can You Trust Your Property Agent in Singapore? Take these 5 Steps to Confidence!

Created by Geoffery Ho Nov 11, 2013 at 11:31pm. Last updated by Geoffery Ho Nov 11, 2013.

Commission GuideLines

Created by Geoffery Ho Sep 21, 2013 at 10:58pm. Last updated by Geoffery Ho Sep 21, 2013.

Total Debt Servicing Ratio (TDSR) and How It Affects Your Loans

Created by Geoffery Ho Aug 26, 2013 at 11:27pm. Last updated by Geoffery Ho Sep 14, 2013.

Banks' Home Loan Comparison & Mortgage Calculators

Created by Geoffery Ho Oct 14, 2008 at 1:05pm. Last updated by Geoffery Ho Apr 16, 2013.

Financing A Commercial Property

Created by Geoffery Ho Apr 16, 2013 at 12:12am. Last updated by Geoffery Ho Apr 16, 2013.

URA Guidelines On Retail Unit Size & Corridor Width

Created by Geoffery Ho Apr 8, 2013 at 12:25am. Last updated by Geoffery Ho Apr 8, 2013.

THE HOUSING LOAN INFO & TIPS

Created by Geoffery Ho Sep 18, 2008 at 1:26am. Last updated by Geoffery Ho Mar 31, 2013.

Type Of Property & EC in Singapore

Created by Geoffery Ho Mar 11, 2013 at 10:00pm. Last updated by Geoffery Ho Mar 11, 2013.

Forum

Draft Master Plan - West Economy

Started by Geoffery Ho in Information May 7, 2014.

CPF FOR PURCHASE OF HDB FLATS LESS THAN 60 YEARS 2 Replies

Started by Geoffery Ho in Information. Last reply by Geoffery Ho Apr 13, 2014.

How Singapore’s Latest HDB Cooling Measures Affect You 1 Reply

Started by Geoffery Ho in Information. Last reply by Geoffery Ho Oct 8, 2013.

HDB flat sellers left in tight spot by new rules

Started by Geoffery Ho in Question Aug 29, 2013.

Watch the wording in 'offer to purchase' letter

Started by Geoffery Ho in Others Aug 14, 2013.

Why Singapore's property continues to rise...

Started by Geoffery Ho in Question Apr 16, 2013.

3 SMARTER WAYS TO SAVE INTEREST ON MORTGAGE

Started by Geoffery Ho in Information Apr 16, 2013.

Feng Shui Tips to Revitalize Your Home 2 Replies

Started by Geoffery Ho in Leisure. Last reply by Geoffery Ho Sep 29, 2012.

3 Lessons From the Sky Habitat Sale

Started by Varchel in Information Sep 17, 2012.

FAQs 3 Replies

Started by Geoffery Ho in Question. Last reply by Geoffery Ho Jul 12, 2012.

99-Year vs Freehold

Started by Geoffery Ho in Information. Last reply by Geoffery Ho Sep 21, 2010.

THIS WEEK'S TOPIC: Keeping speculators at bay 8 Replies

Started by Geoffery Ho in Question. Last reply by Geoffery Ho Sep 14, 2010.

Potential Growth Areas (Residential) - Where to buy?

Started by Geoffery Ho in Others Mar 23, 2010.

How to avoid conflict in real estate transaction 2 Replies

Started by Geoffery Ho in Others. Last reply by Geoffery Ho Nov 9, 2009.

© 2019   Created by Geoffery Ho.   Powered by

Badges  |  Report an Issue  |  Terms of Service