Although Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) has been around since 2013, we still have many friends and clients who will ask us what is the difference between these two. And one of the most common misconceptions that people have will be, TDSR is for Private properties and MSR is for HDB flats! Nope this is definitely not correct. So, let us walk you through what these 2 terms are all about.
What is TDSR?
In 2013, when our government wanted to encourage further financial prudence amongst real estate buyers, our Monetary Authority of Singapore (MAS) introduce these 2 measures and all financial institutions will have to make sure that the buyers are borrowing within the thresholds set.
Many deemed these 2 measures as part of the property cooling measures and there was even a joke that TDSR actually stands for Total Destruction to Singapore’s Real estate. In fact, our real estate market really did suffer a dip because of this introduction. So, what is the big hoo-ha here? Ok let’s get down to the details. Basically, TDSR means that the portion of the borrower’s gross monthly income that is used to service monthly debt payments cannot exceed 60%. The debt payments refer to all debts including stuff like credit cards payments, car instalments, study loans and of course our real estate mortgage loans.
So TDSR is not really just meant for private properties. Even if we purchase a HDB flat, we will also be subjected to this TDSR.
What is MSR?
As for MSR, it is only applicable for housing loans for the purchase of HDB flats and also brand-new Executive Condominiums direct from Developers. So, it is not just meant for HDB flats. Under MSR, buyers are only allowed to use up to 30% of their gross monthly income to service their housing loans.
Are some of you still scratching your heads? No worries here are some examples to give you an even clearer picture.
Example 1
Buyer(s) with household income of $10,000 wanting to buy a private condominium.
They have no debt obligations at all.
60% (TDSR) of $10,000 = $6,000
So, the Buyer(s) can use up to $6,000 to service their housing repayment instalments.
Example 2
Buyer(s) with household income of $10,000 wanting to buy a private condominium.
They have credit card payments and car loan commitments of $2,500 per month.
60% (TDSR) of $10,000 minus $2,500 = $3,500
So, the Buyer(s) can use up to $3,500 to service their housing repayment instalments.
Example 3
Buyer(s) with household income of $10,000 wanting to buy a HDB or brand-new executive condominium.
They have no debt obligations at all.
60% (TDSR) of $10,000 = $6,000
30% (MSR) of $10,000 = $3,000
Although the Buyer(s) can use up to $6,000 for servicing debts, but MSR restrictions only allow them to use $3,000 to service their housing loan.
Example 4
Buyer(s) with household income of $10,000 wanting to buy a HDB or brand-new executive condominium.
They have car loan, study loans and credit card commitments of $4,000 per month.
60% (TDSR) of $10,000 minus $4,000 = $2,000
30% (MSR) of $10,000 = $3,000
For this example, although MSR can allow the Buyer(s) to use up to $3,000 for their housing loan, but due to TDSR only allowing them to use up $6,000 to service their all their debts which they are already having $4,000 of monthly financial commitments, they are only left with $2,000 for the servicing of their housing loan.
Maximum Loan Quantum
All financial institutions will calculate our maximum loan quantum based on how much money can be used to service the housing loan and also the loan tenure based on our age. We also need to note that the banks will not be using prevailing interests’ rates to calculate our loan amount, they will be using a stress test rate of 3.5% to calculate our loan quantum for residential properties and 4.5% for commercial properties.
The reason why banks do not use prevailing interest rates is because bank rates are volatile. Even if you have signed up for a fixed rate package, the interest rate may still increase after the lock-in period* is over. So, this stress test rate is used to ensure that we will still have the ability to service our loans even if bank interest rates increases. After TDSR and MSR were introduced in 2013, the private property price index dipped by 3.5% in the whole of 2014 and HDB prices were down by 1.4% for the last 3 months of 2014. So how did these 2 measures managed to achieve such a feat?
Normally when cooling measures are being introduced, usually they are always being introduced as temporary measures and the measures will be adjusted when the time is right and price is deemed satisfactory in the eyes of the government. But on the contrary, TDSR and MSR are permanent frameworks that were introduced for all financial institutions to follow.
With such frameworks in place, borrowing capabilities decreases and the general affordability of buyers follows south as well. As time goes by, sellers with huge motivation to sell will lower their expectations on their own pricing to match the buyer’s affordability. As it is said, TDSR and MSR are here to stay so it will be good for us be well versed with these 2 terms. We hope this article clarify your doubts but if you still have any more queries, please feel free to drop us a call or message and we will gladly have a non-obligatory chat with you. * Lock-in period refers to the period that we are ‘locked in’ with the bank and during this period we are not allowed to switch to another financial institution even if a better rate is available. Usually during the lock-in period, the borrower will also not be allowed to redeem the loan in full.