Home Mortgage Loan Basics: Total Debt Servicing Ratio (TDSR)
If you are a homeowner or a prospective homebuyer, you have probably heard of Total Debt Servicing Ratio (TDSR). It is an important term to get familiar with, given that it is used for all home loans and home loan refinancing. To help you gain a better understanding of TDSR and its implications as a homeowner, our team has dug into the details to provide an easily accessible, yet comprehensive, summary of this requirement.
- What Is the TDSR Ratio Requirement?
- How to Calculate TDSR
- How Is TDSR Different from LTV & MSR?
- TDSR Applicability & Exemptions
What Is the TDSR Ratio Requirement?
The TDSR is a measure set by the Monetary Authority of Singapore (MAS) and used by banks to prevent individuals for taking out home loans that they cannot afford to repay. Specifically, the TDSR ratio requirement aims to ensure that borrowers have enough income to repay all of their monthly debt obligations, including their mortgage. The current TDSR for property loans is set at a maximum of 55% of the borrower's monthly income.
How to Calculate TDSR
The TDSR formula is simple: total monthly debt obligations / borrower's gross monthly income. Monthly debt obligations include all monthly repayments owed, including home loans (including those being applied for), car loans, student loans, renovation loans, personal loans, revolving loans, credit card debt and any other types of secured or unsecured loans. Gross monthly income includes the loan applicant's monthly income before tax and excludes CPF contributions. Please note that banks are required to apply a "haircut" of 30% on variable (commissions, bonuses) and rental income. This means that those earning variable or rental income will have a slightly lower borrowing limit than their salaried counterparts with similar levels of monthly income.
Example TDSR Calculations
| Individual | Joint Applicants | Variable Income Earner | |
|---|---|---|---|
| Monthly Income | S$8,000 | S$10,000 | S$9,000 |
| -30%"Haircut" | N/A | N/A | (S$2,700) |
| Max. TDSR Threshold | S$4,800 | S$6,000 | S$3,780 |
| Student Loans | S$0 | S$400 | S$0 |
| Car Loans | S$500 | S$0 | S$300 |
| Credit Card Debt | S$0 | S$0 | S$100 |
| Total Debt Obligations | S$500 | $400 | S$400 |
| Maximum Home Loan Instalment | S$4,300 | S$5,600 | S$3,380 |
To get a better idea of how much your monthly home loan instalment will cost, use our free home loan calculator. This tool uses live rates to calculate the monthly repayment and total interest rate of a variety of home loan options for new and resale HDB flats as well as private residences.
How Is TDSR Different from LTV & MSR?
With all of the ratios and acronyms related to purchasing a home, it can be hard to keep up with the significance of each one. In this section, we break down the difference between the TDSR, LTV and MSR rules.
What is The Loan-to-Value Ratio (LTV)?
Unlike the loan-to-value ratio (LTV), which limits how much an individual can borrow based upon the value of their asset (e.g. home, car), the TDSR is based on the homeowner's income and total debt situation. The higher your LTV limit, the more you can borrow and the less you are required to pay as a downpayment.
| 1st Housing Loan | 2nd Housing Loan | 3rd Housing Loan | |
|---|---|---|---|
| LTV Limit: Individual Borrowers* | 75% | 45% | 35% |
| LTV Limit for tenure of 30 years (25 for HDB) or if borrower's age is greater than 65 at the end of loan | 55% | 25% | 15% |
| LTV Limit: Non-Individual Borrowers | 15% | ||
It is true that a lower LTV limit means that you will be required to make a larger payment upfront; however, it can actually save you money in terms of interest costs in the long-run since you will be borrowing less money in total.
How to Calculate the Loan-to-Value (LTV) Ratio
- Loan Amount ÷ Asset Price = Loan-to-Value (LTV) Ratio
- Loan Amount: S$250,000
- Home Purchase Price: S$500,000
- LTV: 50%
What is the Mortgage Servicing Ratio (MSR)
In contrast to the LTV and TDSR requirements, which apply to all home buyers, the Mortgage servicing ratio (MSR) only applies for home loans for HDB flats and executive condominiums (ECs purchased directly from developer only)
- Mortgage Servicing Ratio (MSR) Cap: 30%
- Applies to HDB Flats & Executive Condominiums
Additionally, the MSR restricts the size of your home loan based on your income, but does not consider all of your other debt, like TDSR. In order to purchase an HDB flat, you must meet the LTV, TDSR and MSR requirements. The equation for calculating MSR is: Monthly repayment instalments for all property loans / Gross monthly Income.
TDSR Applicability & Exemptions
Lenders are required to calculate borrowers' TDSRs for all housing loans, loans secured by properties, and mortgage loan refinancing. Additionally, TDSR requirements are used for loans related to residential, commercial and industrial properties. There are a few exemptions to TDSR rules. First, owner-occupiers are not subject to TDSR rules when refinancing their home loan. Individuals that want to refinance their investment property's home loan may avoid the TDSR requirement if they commit to a debt reduction plan (repayment of at least 3% of debt balance in less than 3 years) with their lender and if they meet the lender's credit assessment. Other exemptions include loans secured by a pool of collateral (less than 50% of the credit limit of the loan), bridging loans (with outstanding balance to be repaid within 6 months) and loans secured by property with LTVs under 50%.
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Stephen Lee is a Senior Research Analyst at ValueChampion, specializing in insurance. He holds a Bachelor of Arts degree in International Studies from the University of Washington, and his prior work experience include risk management and underwriting for professional liability and specialty insurance at Victor Insurance. Additionally, Stephen is a former US Peace Corps Volunteer in Myanmar (serving between 2018-2020), where he continues to provide business development consulting services to HR companies in Asia Pacific.