All About Total Debt Servicing Ratio (TDSR)

We all have many dreams in our hearts šŸ’, among all, some are fulfilled, some are kept on the waiting list, and some are buried deep inside.

Our dreams which are on the waiting list keep on trying to get fulfilled, but sometimes to achieve those dreams, we create some big problems in our lives by choosing temporary pleasures over our long-term goals.

Similar can be the case with the borrowers while taking a loan from the company, sometimes we take the loan and get relaxed about our financial control. 

However, you do not need to worry about controlling your finances now because TDSR is a solution or you can say it is a tool that will keep a check on your dues and balance them.

What is TDSR?

TDSR is an abbreviation of Total Debt Servicing Ratio, it is opted by the government of Singapore for keeping a check and maintaining the balance on Singaporean borrowers.

Officially TDSR refers to the portion of the gross monthly income of the borrower that goes towards repaying the monthly debt obligations, which also includes the loan that has been applied for.

The framework of the TDSR standard is applied to all the home loans in Singapore that are granted by Financial Institutions (FIs), which ensures that borrowers have not taken on too much debt.

The Monetary Authority of Singapore (MAS) brought TDSR into the picture of mortgage loans for the benefit of the borrowers.

Purpose of TDSR

  • TDSR was implemented to guide and prevent people from over-stretching in case over-borrowing to finance home purchases.
  • TDSR helps to put a restraint on property speculation. It came out to be a masterstroke because people used to lend crazy amounts of money as loans for buying a property that in the future they would turn out as their profit.
  • An estimated, in the year 2013, shows that 5 to 10% of Singaporean mortgage-holders were over-stretching themselves.

Calculation of TDSR

Having the knowledge about the procedure of the service you are opting for, for the betterment of your life and most importantly for fulfilling, gives you confidence while inquiring and comparing a better deal.

Formula for TDSR

For calculating TDSR, we use the formula:

(Borrower's total monthly debt obligations / Borrower's gross monthly income) x 100%

Calculation for the Numerator of TDSR

The numerator in the formula of TDSR = Borrower's total monthly debt obligations

  • Basics of Monthly Debt

In Monthly debt, all outstanding debt obligations are included. All the outstanding debt obligations are listed below:

  • Property-related loans
  • Car loans
  • Student loans
  • Renovation loans
  • Credit card loans
  • Other secured or unsecured loans, which also include revolving loans.
  • For calculating the monthly debt, Financial Institutions (FIs) will calculate and checks these obligations of yours by:
  • asking for the supporting documents from the borrower, and
  • they will also check with the credit bureau.
  • Calculation of Monthly Debt Obligations
  • Financial Institutions base their calculation on a medium-term interest rate while calculating the monthly interest payable, for a property purchase loan or loan secured by the property under the application.
  • Medium-term interest rates are not applicable for calculating the monthly interest payable, to all property loans, which also include the existing ones.
  • In secured revolving loans, FIs apply the medium-term interest rate to the amount lent to the borrower.
  • In the case of an unsecured revolving loan, FIs use the minimum due from the borrower.
  • Reasons for taking medium-term interest rate as the base for calculation:
  1. Most importantly, medium-term interest rates are taken as the base by keeping in mind the nature of the loan, long-term loan.
  2. Another reason for selecting this baseline is because it ensures that borrowers do not overextend in their property purchases.
  3. It also ensures that the borrowers stay in the state to continue servicing their monthly repayments even when interest rates increase.
  • Loans and their Interest Rates (TDSR)
  1. Residential property: Interest rate should not be less than 3.5% or the prevailing market interest rate, the one with the higher interest rate will be applied.
  2. Non-residential property: Interest rate should not be less than 4.5% or the prevailing market interest rate, same as the previous one, whichever will be higher will be applied.

Calculation for the Denominator of TDSR

The denominator in the formula of TDSR = Borrower's gross monthly income

  • Basic Information about Gross Monthly Income

Gross Monthly Income is basically the monthly income of the borrower before tax, and also excludes any CPF contribution made by the borrower as an employer.

FIs apply a minimum haircut of 30% to both Variable income and Rental income.

  • How to calculate Variable Income and verify Rental Income?
  • Financial Institutions take the average of the monthly variable income earned in the preceding 12 months, for calculating variable income.
  • Rental incomes are verified by the FIs through the copy of the stamped tenancy agreement, and the agreement must include:
  1. the signature of the borrower, and
  2. the record of the remaining rental period of at least six months.
  • Other Financial Assets Eligible for Gross Monthly Income
  1. Liquid assets: It may include Singapore dollars and coins, also including the deposits.
  2. Gold
  3. Collective investment schemes
  4. Debentures
  5. Stocks
  6. Business trusts
  7. Foreign currency notes and coins, which also includes deposits
  8. Structures deposits
  • FIs applies the following while including income streams from eligible financial assets in TDSR:
  • According to the type of eligible, pledged or unpledged, a haircut is applied.
  • FIs schedule an amortization over 48 months to convert the eligible assets into income streams.

Conclusion

Taking a loan is an intelligent way of fulfilling our dreams, but overstretching the limit of borrowing loans over your gross monthly income is also an intelligent way, in the negative sense, to keep all your potentially fulfilled dreams on sale because of your never-ending want for pleasures.

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