FINANCIAL THOUGHTS
What Is TDSR And How It Affects The Average Singaporean?
When you purchase a HDB flat and have to take a loan that is debt. When you want to renovate your new home, you might need to take a renovation loan, which is debt.
We can safely say that we surround ourselves with debt but what the TDSR does is to help you control it. Scroll down further and find out more about the TDSR.
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The limit of borrowing
Total Debt Servicing Ratio (TDSR) is a framework where it limits the amount that a borrower can borrow and the amount that a bank or financial institution can lend.
The TDSR is to make sure that borrowers (individual) do not over-borrow and eventually find it hard to repay back the debt.
The snowball of not being able to pay back the debt might eventually lead to bankruptcy. And that is something that everyone does not want to be.
Therefore, to put it simply, the TDSR is the limit of how much you are able to borrow.
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TDSR explained
60%. Just put this figure inside your mind.
Your monthly debt obligations cannot exceed 60% of your gross monthly salary.
Say for example your monthly salary is $3,000 Your TDSR is $1,800 (60% of $3,000). It is simple maths and anyone can do it.
TDSR can be divided into two parts.
- The Mortgage Servicing Ratio (MSR)
- The Non-Mortgage Servicing Ratio (MSR)
The MSR take half of the TDSR. It means that you can finance your property only up to 30% of your monthly salary. It’s fairly a big amount and that shows that your home might be the biggest purchase of your life.
The other 30% can be used for other types of debts.
One thing that you should be aware of is that if you are a guarantor, your TDSR will be affected. Yes, even if you are not the one taking the loan, your TDSR will be affected.
If the borrower defaults, the guarantor will be the one responsible to pay off the remaining debts.
Thus be careful if you are approached to be a guarantor. Nonetheless, if you do have that leeway, help your fellow niece or nephew go and get their university education.
What constitutes as borrowing under TDSR?
Like mentioned above, it limits the amount that the bank or financial institution can lend to the borrower.
The money that you borrow from the bank and financial institutions are the ones that will be watched under the TDSR.
If you borrow money from your own family or friend, that will not be under the TDSR rules. Thus, this is one of many reasons why you should try your best to borrow from your family and friends.
Allocating the TDSR
As you have that 60% threshold, you really need to plan on when and how much debts that you are able to undertake.
Lets put it in perspectives.
A couple bought their first home and they totally maxed out the 30% MSR limit. Thus, they only have 30% left of the TDSR.
The home needs extensive renovation and they had to take a renovation loan. They eventually had to take a huge loan subsequently; they reached that 60% limit of the TDSR.
However, they have forgotten that they have not bought any furniture.
Unfortunately, they are not able to take a personal loan or even use their credit card as they have reached the 60% limit.
With that, they either have to pay for the furniture via cash or they have to make do with a home without any bed or couches.
That is just a narrative but it may become a reality if you do not allocate your debt undertaking correctly.
You have to understand your own timeline and need. It is possible to refrain from landing into such a scenario if you plan.
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How you can boost up your loan quantum
If you are not able to take a higher loan amount, you can increase your loan quantum by declaring your investments to the bank or financial institution.
The bank or financial institution will take them as another source of income and with that, you concurrently increase your own threshold.
The investments could be stocks, unit trusts, debentures or bonds, gold, foreign currency deposits, and structured deposits. They are considered a liquid asset.
However, only 70% of the value of the assets is accepted. Yes, it is not 100% of your investments.
But if you choose to pledge your assets to the bank or financial institution, it will then be a full valuation. This is something that majorities of borrower rather not do. There may be a possibility that you will lose ownership of the investments.
Only 40% of your income left
It is a huge commitment when more than half of your salary goes to pay off your debts.
If you maximized the TDSR of 60%, you only have 40% left to your own use.
You do have to pay for your daily expenses, transportation, food or any other bills. Everyone knows the importance of savings. If you only have 40% left, it is unlikely that you are able to save.
And insurance coverage is also another important expenditure that needs money in order for you to enjoy the benefits.
Therefore, it is wise for you not to maximize the TDSR of 60%. It does not give you the flexibility to change your lifestyle or choices. It may also limit your options as well in the future.
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Knowing the debt
You have to understand the debt that you will take or have taken.
You should know the loan tenure as you will know when it will end. You should also take note of the type of interest rate. If it is a floating interest rate, at least you know when to refinance or reprice your loan.
Undertaking a debt may help you reach your goals, wants or needs but you have to always be in control of it. You do not want the debt to take control of you.
The TDSR is there to help you manage your debt intake but at the same time, you should know what is your personal threshold as well.
If you want to retire early, having 60% of your salary allocated to debt alone will certainly not make you reach that goal of yours.
Be prudent and think long-term.
Well, that’s the end of this article. Do share it if you think this is beneficial to your friends and family.
Disclaimer:
I am a financial adviser but I am not your financial adviser. Therefore, what is posted on this website, are my opinions and NOT to be taken as financial advice. Information provided might be relevant at this period of time but may be irrelevant due to alterations to rules, regulations or policies. The information provided is true to the best of my knowledge, but there maybe omissions, errors or mistakes.
