What is Total Debt Servicing Ratio?
TDSR provides a measurement of an entity or a person’s ability to repay their debts. But how do you properly compute it and how does it affect you?
Total debt servicing ratio (TDSR) is another credit assessment tool banks and financial institutions (FIs) use to gauge and ensure that borrowers can settle loan repayments properly, by measuring how much of a customer’s income already goes to total monthly debt obligations like credit card debts, mortgages and taxes.
If a TDSR goes beyond the financial institutions limits, then chances are the application would be denied.
How is the TDSR Calculated?
Total debt servicing ratio (TDSR) was implemented in Singapore last 2013 by the Monetary Authority of Singapore (MAS), to help borrowers avoid deep debts due to accumulating car loans, renovation loans, or home loans plus the interest rate that they could not pay.
So how do you compute for TDSR, and how does a financial institution measure whether you can pay a home or housing loan, and other offerings?
The formula is simple: Borrower’s total monthly debt obligations / Borrower’s gross monthly income) x 100% ≤ 60% (A borrower’s TDSR should be less than or equal to 60%.)
Example: If your monthly car loan payments totals to $1,500, then you have to pay your credit cards a total of $500 per month, and mortgage bills of $2,500, then your monthly debt obligations or money allocated towards loan repayments would be at $4,500.
If your household has a combined monthly income of $10,000 — without considering other variable income like rental income and investments — what you would do is divide your total monthly debt obligations by this monthly salary.
Total monthly obligations:
- $1,500 car loan payments
- $500 credit cards
- $2,500 mortgage bills
1,500 + $500 + $2,500 = $4500
Total monthly income: $10,000
Therefore, $4,500/ $10,000 x 100 = 45%
Because the ratio is below 60%, the individual would most likely qualify for a loan.
What is a Good TDSR?
Experts from various financial institutions believe that a good TDSR is around 25 to 35 percent, although it may be hard to achieve sometimes.
So if you would take in an additional $1,000 of monthly payments, that would take monthly obligations to $5,500.
This would give you a TDSR of 55 percent — still below the 60 percent bracket which means there is a good chance that your application for that loan amount would be approved.
What to Do if Your Loan is Rejected?
While there are other debt reduction plans – like consolidation, acquiring secured loans where assets may be placed as a collateral – sometimes the best solution to debt is not going into debt at all.
While your existing loan application may be rejected, you can apply for a different loan that would require payments that would keep you within the 60 percent TDSR. Or, you can settle your outstanding balance like credit card balances and student loans first, before applying for another.
How is TDSR Different from MSR and DSR?
Aside from the TDSR, there are other means of credit assessment. But although TDSR may seem similar to Mortgage Servicing Ratio (MSR) and Debt Servicing Ratio (DSR), these terms differ largely.
Mortgage servicing ratio (MSR)
Mortgage servicing ratio (MSR) refers to the portion of a borrower’s gross monthly income that goes towards repaying all property loans, including the loan being applied for.
MSR is capped at 30% of a borrower’s gross monthly income. It applies only to housing loans for the purchase of an HDB flat or an executive condominium bought directly from a developer.
Formula: Monthly repayment instalments for all property loans / Gross monthly Income x 100% = MSR
Example: In the example above, if you have an income of $10,000 and $2,500 of it goes to mortgage payments, then it is acceptable as it only comprises 25 percent of your monthly salary.
- Monthly repayment $2,500
- Gross monthly income $10,000
Therefore, $2500/ $10,000 x10 = 25%
Because the ratio is below 30%, the individual would most likely qualify for a loan.
Debt-Service Coverage Ratio (DSR)
Debt-Service Coverage Ratio (DSR), on the other hand, is a measure of the cash flow available to pay current debt obligations.
Formula: Net operating income / Total debt service x 100 =DSR
Example: If you use the example above where the loan payments for the month totals to $5,500 and gross monthly income is at $12,100 — you will multiply both by 12 for annual figures, arriving at $66,000 and $145,200, respectively.
Answers greater than 1 are indicative of good credit standing. In this scenario, DSR is at 2.2, which means a person or a company has a good chance of his or her loans getting approved.
- Net operating income $12,100 x 12 = $145,000
- Total debt service $5,500 x 12 = $66,000
Therefore, $145,000 / $66,000 = 2.2
Because the ratio is greater than 1, the individual would most likely qualify for a loan.
What is The Impact of TDSR?
The TDSR implemented by MAS is seen as a more stringent way of measuring whether a person can take loans and their corresponding interest rate, like home loan, housing loan, property loan, renovation loans, and others because it is a comprehensive assessment of individuals’ loan obligations.
Unlike TDSR, DSR does not include some unsecured loans like credit card payment.
There is a reason why the word “total” is in TDSR and why it is not included in DSR. More debt payments are factored in with TDSR compared to DSR and MSR.
- Investing in properties becomes harder: because it seems almost impossible to take on a loan without breaching the 60 percent threshold set by the Monetary Authority of Singapore.
- You can’t borrow as much: As seen above, if your monthly income is lower and you do not have other sources of income, you could easily go over the TDSR allowed in Singapore. This also means that you cannot borrow as much if you are likely to surpass the 60 percent range.
- Increased financing risk: Because home loan interest rates are usually lower on the first few years before fluctuating later on, your TDSR may actually be below 60 percent initially — only for it to move past the mark once you see a spike in interest rates.
- Borrowing less: As customers may need to adjust the loans that they want to fit the 60 percent quota, a borrower may end up with a loan smaller than what he or she needs.
- It’s also harder to stretch loan tenure, as prior to TDSR, you can use a younger applicant — like your child — to apply for a joint loan with longer repayment schemes.
This is because your 25 year old child is allowed to settle debts for a loan tenure for 30 years as he or she would be 55 by the time the loan ends, compared to a 50 year old parent who would be well into his or her retirement.
But under TDSR, they would use the average age of the individuals borrowing money, in this case, 37 years old.
Exemption: Refinancing
There are ways to avoid the TDSR especially if you are refinancing owner-occupied housing loans. This means that you can still seek refinancing of home loans if you are having problems with your income later on, without considering the 60 percent TDSR set in Singapore.
You can also do away with the TDSR if your loan obligations are already past the 60 percent mark, provided that existing properties are sold, you have no other properties and no existing property loans, and you meet the criteria from financial institutions.
