The Total Debt Servicing Ratio (TDSR) framework was adopted to ensure you don’t borrow beyond your means. And it now applies to all housing loans serviced by all Financial Institutions (FIs).
TDSR is a calculation of the percentage of your income that goes toward repaying your existing loans. The TDSR limit is currently 60%, which means if your total debt repayments take up more than 60% of your income, you won’t get a home loan.
TDSR takes into account ALL of your outstanding debt including:
- Student Loans
- Credit Card Balances
- Car Loans
- Personal Loans
How is TDSR Different from DSR or MSR?
The Total Debt Servicing Ratio (TDSR), Debt Servicing Ratio (DSR), and the Mortgage Servicing Ratio (MSR) are not the same thing.
Here’s why:
- MSR deals only with your housing loan repayments and doesn’t take into account your other repayment obligations. So an MSR of 30% means 30% of you monthly income can go towards your home loan repayments.
- DSR factors in most of your repayment obligations but not all of them. Some unsecured loans such as credit card debt are not taken into consideration.
- TDSR factors the widest range of your repayment obligations including both secured and unsecured debts. That makes it the most restrictive of the three servicing ratios.
How Restrictive is TDSR?
TDSR of 60% sounds deceptively relaxed, but it’s one of the biggest restrictions you’ll run into when buying a home.
Here’s why:
- Property investing is more difficult: If you already have an outstanding home loan, the TDSR makes it harder to buy another home without breaking the 60% debt ratio limit.
- Your borrowing power is limited: When you take out a home loan, the banks implement a 3.5% “stress test,” to see whether you can handle interest rate spikes. So your TDSR needs to be at 60% even with the “stress test” rate, which lowers how much you can borrow.
- Refinancing is tougher: Home loan interest rates can be low for three years and then dramatically rise on the fourth. Normally, you’d switch to a better loan package. But if you took out a big loan before the TDSR framework, you might not be able to refinance because you can’t meet the 60% TDSR. MAS most recently relaxed the rules for owner occupied properties that refinance, but the banks are allowed to implement this at their own discretion. Check with a MoneySmart mortgage specialist if you need to know more..
- Variable income earners must borrow less: If you’re a business owner, landlord, or work as a commissions-based salesman, you’re classified as having variable income. This means your TDSR will be calculated from 70% of your monthly income.
- It’s harder to extend your loan’s tenure: In the past, loan tenures could be determined by the age of the younger borrower on a joint application. Now, if you want to get your first home through a joint application, a weighted average age of both borrowers will be used to factor loan tenure. And both borrowers must have an income.
- You must dig through mountains of statements: To determine your TDSR, banks will need just about every kind of monthly statement you have, from your credit cards to your gym membership. And if you have variable income, you’ll need to provide proof of rent collection, commissions, fees, etc.
