Buying a home is no doubt an exciting, pivotal point in your life. Whether you’re buying a home with a partner, or you’re looking to invest in property yourself, there are some things you need to have figured out. Before ploughing through all the mortgage loan offers on the market, you need to first acquaint yourself to two things: the Total Debt Servicing Ratio (TDSR) and the Mortgage Service Ratio(MSR).

Total Debt Servicing Ratio (TDSR)

The TDSR  was introduced in June 2013 by the Monetary Authority of Singapore(MAS) to prevent you from becoming financially overextended because of your property purchase. In short, the TDSR limits the amount one can borrow for a mortgage loan to 60% of your gross monthly income. Any outstanding debts are factored into the TDSR percentage and will affect how much you can afford to pay on your monthly home loan repayments.

Outstanding debts refer to the following:

– Credit Card Balances and instalments
– Car loans
– Personal loans
– Study loans
In short,

TDSR Calculation

TDSR Calculator singapore

Example 1

1) Donald draws a monthly income of $8,000 per month and services a study loan of $1,000 at the point of loan application.

2) Nellie has an income of $8,000 as well, but 40% of it is variable (commission-based).

Both are looking to take out their first mortgage loan to finance their first property purchase.

 

DonaldNellie
Monthly Income$8,000$8,000
Fixed Income$8,000$4,800
Variable Income$0$3,200$2,240 (after -30% haircut)
Applicable Income$8,000$7,040
TSDR(60%)$4,800$4,224
Study Loan-$1,000$0
Balance income for Property Loan$3,800$4,224

Here, you will see that with the application of the TDSR to include considerations of variable income and other existing loans, the balance income available can differ by a few hundred dollars.

And there is more…

Using Donald as an *example, you will see that he has $3,800 of his gross Income that can be put towards mortgage servicing. If that were the only limiting factor, and at the MAS ‘stress test’ interest rate of 3.5%, he could afford a property worth around $810,712. However MAS regulations on Loan-to-Value (LTV) limits your affordability to a property worth $319,812.

Loan to value (LTV) is one of the key criteria when a home buyer decides on a housing loan. It shows the housing loan quantum a bank is willing to offer as a percentage to the valuation of the property.

Most first-time home buyers want to obtain a loan to value ratio of 80%, but this really depends upon your financial situation when the bank extends the loan to you. The amount of housing loan offered by the lenders ultimately depends on your personal income and financial commitments. With a low annual income, you may only be able to obtain 50% financing even if you legally qualify for 80%.

Mortgage Service Ratio (MSR)

If you are looking to purchase a HDB resale flat or Executive Condominium, you will also need to consider 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$6,000 a month, the most the MSR will allow you to pay a maximum monthly mortgage repayments is S$1,800.

This means that even if you do not have any outstanding debts and can borrow 60% of your gross monthly income under the TDSR, the maximum amount you can borrow is only 30% of your gross monthly income if you are looking to buy a HDB flat.

Do not make the mistake of making a down payment for a property and later finding out that you cannot afford to finance it. It is thus always best to check with a qualified property agent for advice first.

Find out more on the 3 Types of Real Estate in Singapore and where we are at the Singapore Housing Cycle.

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C.E.O @ The New Savvy
Anna Haotanto is passionate about finance, education, women empowerment and children’s issues. Anna has been featured in CNBC, Forbes, The Straits Times, Business Insider, INC and The Peak Singapore. She was nominated and selected for FORTUNE Most Powerful Women conference in 2016 (Asia) and 2015 (San Francisco, Next Gen). Anna has 10 years of experience in the financial sector and is currently a Director in Tera Capital. Her previous work experience includes positions at Citigroup, United Overseas Bank, a regional role in Business Monitor and a boutique private equity firm based in Shanghai. She graduated from Singapore Management University (Finance and Quantitative Finance).