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Humanising Finance
June 2017
   
 

Importance of TDSR for home buyers

You might have come across the term 'Total Debt Servicing Ratio (TDSR)' in news articles regarding the purchase of a property or application for a home loans Do you understand its relevance if you are planning to apply for a home loan? How much do know about the changes to the TDSR framework announced in March this year?

What is TDSR?

Introduced by the Monetary Authority of Singapore in June 2013, the TDSR provides banks with a robust basis and standardised approach for assessing the debt serviceability of borrowers who are applying for loan facilities for purchase financing, refinancing and equity withdrawal loans secured by property.

The TDSR limits the amount that home owners can borrow, as it requires that your monthly mortgage repayment, along with all your other monthly debt obligations (for example car loan, personal loan, credit card bills) cannot exceed more than 60% of your monthly gross income.
 
What is TDSR?
 
 
Impact of TDSR on your home loan application
Here's an example of how the TDSR affects the maximum home loan you can apply for.
 
Gross monthly income S$6,000
Maximum monthly debt permissible
(60% of gross income)
S$3,600
Current monthly debt repayments
(e.g. personal loans, credit card bills)
S$800
Monthly income available for home loan payment S$2,800
Estimated maximum home loan
(based on a 30 year home loan with interest rate of 3.50%)
S$620,000
 
In addition, if you are buying a HDB flat or an Executive Condominium (EC), you will be subjected to another ratio that the bank is required to derive, known as the Mortgage Servicing Ratio (MSR), which is set at 30%.

Based on the example above, the maximum monthly home loan instalment permissible for an HDB/EC purchase due to MSR is S$1,800 (30% of gross income).

Hence, if you cannot meet the TDSR, you either have to lower your home loan by making a bigger downpayment for your property purchase or consider buying a more affordable property.

Alternatively, if you are seeking refinancing for your owner-occupied property, you can be exempted from the TDSR. However, if you are looking to refinance your home loan for an investment property, it will be subjected to the TDSR unless a debt-reduction plan is arranged with your bank. A debt-reduction plan is one where you commit to repay 3% of the outstanding balance over a period of not more than three years.
 
Impact of TDSR on your home loan application
 
 
How can you improve your TDSR?
Given that the TDSR is here to stay, here are some ways you can improve your TDSR.
  • Analyse your eligible financial assets - If you have assets such as Singapore dollar deposits, gold or stocks and shares, your bank may be able to assess the value of these assets and convert them to extra "income streams". This will boost your monthly income and bring down your TDSR. Check with your bank for a list of such eligible assets and the corresponding collateral haircuts (reduction to the value of assets).
  • Reduce your monthly loan commitments - The most direct way to do this is to reduce your debt. Where possible, pay up your car loan or the outstanding amounts on your credit card statements, which will likely also help you to save on interest payments.
 
 
Latest changes to the TDSR
Recently in March 2017, the authorities made some revisions to the TDSR framework. Most notably, the 60% TDSR threshold will no longer apply to mortgage equity withdrawal loans where the loan-to-value (LTV) ratio is 50% and below. The LTV ratio is the ratio of the home loan to the current market value of the property.

Equity withdrawal loans refer to loans where you borrow against the value of your private property to obtain cash, when your home loan has been paid down over the years. As clarified by the authorities, this revision to the framework aims to help home owners to monetise their properties in their retirement years.
 
How can you improve your TDSR?
 
At the same time, the rule where 'the borrower is to be mortgagor' has been removed for equity withdrawal loans. Therefore, if, for instance, your home loan has been fully or substantially paid down, and you wish to have some money to send your children for tertiary education overseas or to support their start-up business, you can consider applying for an equity withdrawal loan where your children may be included as borrowers. This means that they will also be liable for payment of the loan.

However, do note that the borrower-mortgagor requirement still applies to credit facilities used to purchase residential and investment property.
 
 
Financing your dream home can be a breeze. Be it financing or refinancing your home loan, Maybank offers one of the most attractive home loan interest rate packages in Singapore. Take the first step on a hassle-free journey towards your home ownership by calling our customer relationship executives on 1800 629 2265 (1800-MAYBANK) who can advise you further.

Always wanted to find out more about a finance-related issue? Email us at: corporateaffairs@maybank.com.sg
 
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