3 Questions to Ponder About Total Debt Service Ratio for Borrowers in Singapore

Total Debt Service Ratio (TDSR) became a household term for mortgage borrowers of properties in Singapore. This is a new mortgage framework introduced by the Monetary Authority of Singapore (MAS) to strengthen the crediting practices of financial institutions in Singapore.

Four years after the Global Financial Crisis that almost resulted in a meltdown in the global banking system, Singapore introduced the TDSR framework on 28 June 2013 to regulate all mortgage issued by financial institutions in Singapore. A weak banking system allows mortgage borrowers easy access to borrowing. Often, borrowers tend to borrow beyond their means and things will spiral beyond control when property prices continue to rise surpassing previous peak. This is because when property prices start to drop, a potential crisis awaits.

TDSR is conceived as a pre-emptive move by the Singapore government to put a stamp on the rising property prices at that time by tackling the root of this problem; easy access to cheap money due to a low interest rate environment. For the man on the street, this is an unpopular move but fast forward to present, the measure has achieved its intended purpose.

Local financial institutions in Singapore are among the strongest financial institutions in the global arena and this is backed by the strongest ratings from international ratings agencies such as Moody's, Standard and Poor's, and Fitch.

Although stricter loan regulation due to TDSR means that financial institutions have to turn away borrowers that cannot meet the minimum requirement, these financial institutions take the opportunity to expand their business to regional countries such as Malaysia, Indonesia, Thailand and diversify their business portfolio. More importantly, the country has managed to keep the runaway property prices under control and instil a more responsible mindset in borrowers.

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In the last twelve months, there were repeated calls by property developers to the government to remove measures that stymie the demand for property. TDSR is often look upon as the primary tool that reduces the number of mortgage approved by financial institution and this has resulted in lesser demand for property. However, the government has responded that this is not the right time to remove the TDSR yet. As TDSR looks to stay on for sometime, let's take a look at 3 things whether TDSR really affects you:

1) Does TDSR affects everyone?

Buyers of properties who do not apply mortgage are not affected by TDSR. Moreover, only financial institutions regulated by MAS need to abide to the TDSR framework. Hence, borrowers can consider taking mortgage from foreign or offshore banks.

2) How do I increase the amount that I can borrow?

TDSR looks at the proportion of your monthly debt obligation compared to your monthly income. For employed borrowers, you can consider including other liquid financial assets (ie Singapore dollar and coins, including deposits), and a specified list of other assets, namely collective investment schemes, business trusts, debentures or stocks, structured deposits, foreign currency notes and coins (including deposits) and gold, which have a secondary market or reasonable basis for valuation and to the extent that the asset is unencumbered.

3) Are there any exemptions to TDSR?

TDSR is exempted if the loan is for an owner- occupied property and where:

(I) the option to purchase (OTP) the residential property was granted prior to 29 June 2013;

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(ii) the residential property is the only property owned by the borrower (either by himself or jointly);

(iii) the borrower is one of the occupiers of the residential property;

(iv) the borrower does not have any outstanding loan for the purchase of any other property or the re-financing of such a loan, apart from the residential property being re-financed; and

(v) the borrower does not have any outstanding loan (either in his own name or jointly with another borrower) otherwise secured on any property, including the residential property being re-financed, or the re-financing of such a loan.