What is Total Debt Servicing Ratio (TDSR) and How it Affects Your Home Loan

Total Debt Servicing Ratio (TDSR) is a crucial factor that can either make or break your borrowing dreams.

Whether you are financing a property for your own stay or investment, you not only have to care about the ever-rising property prices, but also need to understand what TDSR is and how it can impact your loan application.

In this article, we will explore:

What TDSR is,
Why the TDSR was introduced,
How TDSR affects your home loan, and
How TDSR is calculated.

What Is TDSR?

In simple terms, the Total Debt Servicing Ratio (TDSR) is a framework put in place by the Monetary Authority of Singapore (MAS) to ensure that people don’t bite off more debt than they can chew. It’s essentially a method banks use to assess whether you can afford the loan you’re applying for, especially home loans.

Imagine the TDSR as your friendly financial gatekeeper, keeping your debt obligations within a manageable realm and helping you maintain a healthy and balanced financial lifestyle.

Why Was the TDSR Introduced?

We’ve all heard the classic fable of the tortoise and the hare, right? Slow and steady wins the race. That’s pretty much what the MAS had in mind when they introduced the TDSR in June 2013 because of the soaring property prices at that time. It was to make sure individuals borrow responsibly, and not end up drowning in debt.

Source: Singapore Residential Property Price Index

As you can see from the Singapore Residential Property Price Index, numbers have been increasing since the global financial crisis. And only after TDSR was introduced, the property price start to decline.

Source: List SIR, URA, MAS

The aim of TDSR was thus to ensure that borrowers and financial institutions adopt a more prudent and responsible approach towards loan commitments. Rather than rushing into loans with the fervour of a hare, the TDSR encourages everyone to adopt the tortoise’s methodical, cautious pace. This makes sure we don’t end up overextended and struggling with repayments we can’t afford.

How The TDSR Affects Your Home Loan

So, how does the TDSR affect your home loan? The answer lies in its implementation.

The Total Debt Servicing Ratio, TDSR, limits the amount that you can spend on your monthly debt repayments (student loans, car loans, personal loans, etc).

It was initially 60% but was revised to 55% on 16 December 2021 because property prices continued to increase rapidly, and people are flocking to showrooms to buy properties.

Source: The Business Times

That being said, a lower TDSR percentage means a higher likelihood of your loan being approved! So, your dream house might seem a bit closer than you think, as long as you maintain a manageable TDSR.

How is TDSR Calculated

Alright, math wizards, it’s your time to shine! But don’t worry, you won’t need a magic wand to calculate your TDSR. It’s as simple as understanding your total monthly debt obligations and your total monthly income.

The formula is quite straightforward:

For example, if your gross monthly income is $10,000, and your total monthly debt obligations amount to $5,000, your TDSR would be:

($5,000 / $10,000) x 100% = 50%

Remember, your monthly debt obligations include all your outstanding loans such as car loans, personal loans, student loans, credit card debts, and of course, your prospective home loan.

Although it’s simple to calculate, there are various components, like variable income and income-weighted average age, that might make things a bit tricky. So it’s always beneficial to get some expert advice!

Concluding Thoughts

The TDSR might seem like an intimidating roadblock on your journey to owning your dream home. But in reality, it’s a handy tool to ensure your financial health and stability. Remember, the journey of a thousand miles begins with a single step. And the more informed you are, the more confident that step will be.

As always, we want to provide you with the best financial knowledge and make informed decisions.

To delve deeper into mortgage refinancing and explore strategies to optimize your property loan, we will be hosting an upcoming webinar on Mastering Mortgage Refinancing in collaboration with the leading mortgage broker in Singapore.

This webinar is perfect for you if:

Your mortgage repayments are starting to feel burdensome
You’re keen on strategies like saving on interest, changing your loan tenure, or cash out your home equity or improving your debt ratio
You have ambitions of diving into property investment or scaling up your portfolio

If you have a mortgage loan, you don’t want to miss out on this opportunity to improve your cash flow and save mortgage interest costs.

Until next time, keep dreaming, keep planning, and keep saving!

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

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