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Property Guidelines - What is Total Debt Servicing Ratio?

The Monetary Authority of Singapore (MAS) will introduce a Total Debt Servicing Ratio (TDSR) framework 28 June 2013 for all property loans granted by financial institutions (FIs) to individuals.

This will require Financial Institutions to take into consideration borrowers’ other outstanding debt obligations when granting property loans. They will help strengthen credit underwriting practices by Financial Institutions and encourage financial prudence among borrowers.

2   MAS will also refine rules related to the application of the existing Loan-to-Value (LTV) limits on housing loans.  These refinements seek to ensure the effectiveness of the LTV limits that were put in place to cool investment demand in the housing market.  In particular, they aim to prevent circumvention of the tighter LTV limits on second and subsequent housing loans.

The Total Debt Servicing Ratio (TDSR) is a framework to ensure that people borrow, and banks lend, responsibly.

In a nutshell, the TDSR limits the amount borrowers can spend on debt repayments to 60 percent of their gross monthly income.

Unlike other cooling measures, which are expected to be temporary, the TDSR is a permanent structural reform that all banks and financial institutions must follow when assessing the housing loans, the refinancing of housing loans, and loans secured by the property.

Why was it introduced?

The TDSR was introduced to “strengthen credit underwriting practices by financial institutions” (ensure loans are only issued to borrowers who can afford them) and “encourage financial prudence among borrowers” (help borrowers consider the true budgetary impact of a mortgage).

The TDSR standardized the framework banks use when assessing a potential borrower’s capacity to make loan repayments and help prevent high-risk loans being issued.

So how does the TDSR affect you?

The TDSR limits the amount you can borrow – your loan quantum – by ensuring your monthly repayments account for less than 60 percent of your income. For those purchasing new condo launch or resale residential properties.

For HDB flats and ECs, mortgage repayments must not account for more than 30 percent of a borrower’s gross monthly income, even if they have no other debt obligations. (See Mortgage Servicing Ratio)

How does the TDSR impact my ability to secure finance?

The calculation of the TDSR itself (see below example) is not difficult. However, partly as a result of other cooling measures, and partly because of tweaks made to close loopholes in the original framework, the actual mortgage calculation process has become much more restrictive:

•• Loan-to-Value ratio limits apply (from a maximum of 80%, it is now down to 30%),

•• new rules for loan tenure apply (now with a maximum tenure of 35 years),

•• a stress-test interest rate (currently 3.5 percent for residential properties) is used,

•• variable income and certain financial assets are subject to a haircut, and

•• guarantors, mortgagors, and borrowers are now effectively one and the same.

 

In the case of HDB flats and ECs

•• a Mortgage Servicing Ratio of 30 percent applies.

 

In the case of joint borrowers, the TDSR is calculated based on the aggregate gross monthly incomes and debt obligations and:

•• the income-weighted average age of borrowers is used to determine loan tenure.

 

TDSR Exemptions

For certain categories of borrowers whose existing loans exceed 60 percent of their gross monthly income, the Government has issued exemptions to the TDSR framework.

Owner occupiers are exempted from the TDSR in cases where:

• they do not own any other property, and

• they do not hold any other property loans.

 

From 1 September 2016, all owner-occupied residential properties, including those bought after the introduction of TDSR, may be refinanced above the TDSR threshold of 60 percent as long as:

• the borrower commits, at the point of refinancing, to a debt reduction plan with his bank comprising a repayment of at least 3 percent of the outstanding balance over a period of not more than 3 years.

• the borrower satisfies the bank’s credit assessment criteria.

The original TDSR framework also included provision for financial institutions to grant property loans exceeding the 60 percent threshold provided

• they are granted only on an exceptional basis,

• they are subject to enhanced credit evaluation by the financial institution, and

• the reason/s for granting the loan and the details of the loan are reported to MAS.

 

How does the TDSR apply when upgrading?

For certain categories of borrowers whose existing loans exceed 60 percent of their gross monthly income, the Government has issued exemptions to the TDSR framework.

Owner-occupiers wanting to purchase a HDB flat or EC directly from a property developer are also exempted from the TDSR threshold provided:

• they will sell their existing property,

• they own no other properties,

• they hold no other property loans, and

•they meet the financial institution’s credit assessment criteria.

What is Mortgage Service Ratio?

MAS introduced a TDSR framework in June 2013 to strengthen the credit underwriting practices of financial institutions and encourage financial prudence among borrowers. The TDSR has to be computed for individual borrowers obtaining a property loan from a financial institution and should generally not exceed 60%.

To instil greater financial prudence among borrowers, MAS also lowered the maximum tenure of new loans granted by financial institutions for the purchase of HDB flats from 35 years to 30 years in August 2013. Loans with tenures that exceed 25 years or whose loan periods extend beyond the borrower’s age of 65 are subject to tighter loan-to-value limits.

In addition, MAS introduced a mortgage servicing ratio of 30% on loans for the purchase of executive condominium units bought directly from property developers in December 2013.

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