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Humanising Finance
April 2016
     
Total Debt Servicing Ratio (TDSR)
– the scariest word when buying a house?
Despite being introduced more than 2 years ago, the details of the Total Debt Servicing Ratio (TDSR) framework still remains a mystery to some.

With the recent news about the weak property market, it might be a good time to start looking in the market for attractive deals. But before that, it is first important to know the amount you can borrow to determine the price range of the property you should be looking at.
 
What is the TDSR?
TDSR is calculated by using your monthly total debt obligation (MTDO) divided by your gross monthly income times 100% to get your percentage of debt.
Monthly Total Debt Obligation
 

X
100%
Gross Monthly Income
Figure 1: The first step in your property search is to know how much you can borrow
 
The MTDO includes your existing short and long term debt, spending roll-overs and new loan repayment. The gross monthly income consists of your fixed and variable income. When taking into account the variable income, a reduction of 30%, also known as a ‘haircut’, is applied to reflect the potential volatility and uncertainty of this income.

Ultimately, the TDSR ratio must not exceed 60% after accounting for the new home loan application.
 
What is included in the monthly total debt obligation (MTDO)?
 
Unbeknownst to many is that the MTDO covers 5 major areas. The areas are outlined in figure 2 below. The first item that is listed under the monthly debt obligation is the subject loan instalment. This is essentially the amount that has to be repaid on your home loan. The amount can be determined by using the various home loan calculator tools available online. Banks generally apply a standard calculation on the housing loan, using a prescribed interest rate of 3.5% p.a..
 
Subject Loan Instalment
+
Other Loan Instalments
+
Credit Card Outstandings
+
Secured Revolving
+
Guarantor
   

  <=60%
Fixed Income
+
Variable Income
+
Rental Income
+
Assets (unpledged)
+
Assets (Pledged)
   
Figure 2: Borrowers often overlook their other loan instalments which could result in them ‘over-committing’ when buying the new home
 
For example, if you are taking out a home loan of $500,000, with a repayment period of 25 years, the monthly repayment amount $2,503, which will therefore, be added into the TDSR calculation.

The other loan instalments in the figure, refer to repayment of various other terms loans that borrower enjoys, e.g. Car Loans, Existing Home Loans, Equity Term Loans, etc. This is generally one of the largest areas of concern that impact on one’s eligibility. Many borrowers underestimate their other borrowings, which may result in them ‘over-committing’ when buying the new home. 
 
So then, what counts as gross monthly income? 
 
For most people, this typically consists of their regular monthly earned salary, which is given 100% recognition and variable earnings like year-end bonuses, additional incentives, commissions and dividends which again, gets a haircut of 30% due to the potential uncertainty of such income.

However, as seen from figure 2, this actually can also include financial assets which could either be pledged or unpledged to the bank. The key difference is that pledged assets enjoy a lower haircut percentage because of the certainty it gives the bank in terms of repayment ability.
 
After the required haircut, the remaining value of the financial assets will be divided by 48 months to determine its contribution in terms of its value into the monthly income component.
 
Figure 3 below provides an illustration of the types of financial assets that are eligible and the ‘haircut’ it receives.
 
SGD Deposits
 
Haircut of 70% for unpledged
and 0% Haircut for pledged
Unit Trusts
 
Haircut of 70% for unpledged
and 30% Haircut for pledged
Listed Shares
 
Structured Deposit
 
Foreign Currency Deposits
 
Gold
 
Figure 3: Eligible financial assets and their respective ‘haircuts’
 
It is important to understand the TDSR, which will help you be more measured, informed and confident when making property-buying decisions. To understand more about how the TDSR works and the loan amount that you are eligible for, you can also seek professional advice from a financial advisor. Get in touch with our team of professional wealth managers by visiting our branches or make an appointment online to speak with a wealth manager.
 
 
Always wanted to find out more about a finance-related issue? Email us at: corporateaffairs@maybank.com.sg
 
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