How To Calculate Total Debt Servicing Ratio (TDSR)

Total Debt Servicing Ratio (TDSR) Mortgage Calculation
Mortgage Calculation

A lot of measures have been taken by the Singapore government to prevent housing prices from inflating beyond control. Because of these measures, the process of procuring a house, that is suitable to the buyer’s needs, is now a daunting task. Buyers experience a lot of difficulty comprehending the term “Total Debt Servicing Ratio” and what it means for them. A rudimentary definition of TDSR identifies it as a debt service measure that tells buyers whether or not they can afford the property they wish to purchase. It tells financial lenders whether a potential buyer is already in too much debt or not.

The general TDSR framework allows financial lenders to lend you 60% of your gross income, sans your outstanding debts and other payments. TDSR takes into account all credit card balances, car loans, student loans, personal loans, and all other loans that are applicable. Most borrowers are under the impression that the permissible limit is well-suited to their needs. However, this is rarely the case as people tend to have a plethora of obligations that affect the treatment of TDSR. TDSR is not applicable on fixed income only, but also takes into consideration a buyer whose earnings are susceptible to fluctuation. In case of a variable income earner, the buyer’s income is liable to a 30% ‘haircut’ before TDSR can be applied. The term ‘haircut’ shows the lender’s perceived risk of loss if the asset falls in value. The following table shows the treatment of TDSR in each case:

Fixed IncomeVariable Income
E.g. If your gross monthly income is $20,000 and you have no obligations, your maximum TDSR limit is (60% of $20,000 = $12,000)E.g. if you have an average gross monthly income of $20,000, a 30% ‘haircut’ will be applied on this. It will amount to $6,000, that is, your ‘real’ gross monthly income will be $14,000. Your maximum TDSR limit will be (60% of $14,000 = $8,400)
However, if you have a monthly debt payment of $4,000, your maximum TDSR limit will amount to ($12,000-$4,000 = $8,000) However, if you have financial obligations that amount to say, $3,000, then you can afford a home with monthly payments of ($8,400-$3,000 = $5,400)

Another term that is worth mentioning is the ‘stress test’. The stress test is an indication of whether or not the buyer can withstand a rise in the interest rates. This measure tells the buyer if he can afford to pay larger amounts of mortgage payments.

Sometimes, the buyer must also consider the MSR (Mortgage Servicing Ratio). It restricts the buyer to spend only 30% of his gross monthly income as repayments on the purchase of HDB (Housing Development Board) or EC (Executive Condominium).

Buyers can calculate the TDSR on their own, even if they do not have expert knowledge of the housing market. There are several free calculators that are available online. Even so, buyers must use this tool judiciously and must consult an authority on the subject before making a purchase.

If you are looking for a recommendation on expert TDSR advice, contact New Condo Launch | Condo Singapore


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