Written March 2022
For many of us, a house loan is a must as the dream home we are purchasing is a big ticket item. Therefore, it is necessary to understand that when a house loan is extended, Financial Institutions (FIs) would check and ensure that our Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR) are within acceptable thresholds.
Unsure what they refer to? Here is a comprehensive guide of what they are.
Mortgage Servicing Ratio (MSR)
For the uninitiated, MSR refers to the portion of your gross monthly income that goes towards repaying all property loans, including the current one you are applying for.
MSR is capped at 30% of your gross monthly income.
Do note that it only applies to housing loans for the purchase of an HDB flat, or an executive condominium where the minimum occupation period of the executive condominium has not expired.
When calculating MSR, FIs will take into consideration:
All the borrower’s property loans.
At least 20% of the monthly debt obligation for any property loan where you is a guarantor.
To put things into perspective, let’s have an example. Sally is drawing $7000 a month, and already owns a HDB resale flat that takes up $1,500 of loan repayment per month. This will mean:
Current MSR = $1,500 existing monthly loan repayment / $7,000 income = 21% already taken up
Under the current restriction of 30% cap, we only have 30% - 21% = 9% left
If Sally wants to apply for another property loan, she will only have = 9% x $7,000 = $630 left a month for another set of property monthly loan repayments
This will essentially limit the number of HDB and ECs you can afford as your total MSR cannot exceed 30% of your gross monthly income.
Tightened Total Debt Servicing Ratio (TDSR)
Next, we take a look at TDSR. TDSR is the ratio where new mortgages cannot cause borrowers’ total monthly loan repayment to exceed a certain percentage of their total gross income.
In the past, it was at 60%. However, with the recent tightening of the TDSR, the threshold has decreased from 60% to 55%.
If you need to see things from perspective, let’s have an example as well. For example, Bob is drawing $8,000 a month. Let’s take it that he has a car and credit card bills, which take up to $2,000 of loan repayment per month. This will mean:
Current TDSR = $2,000 existing monthly loan repayment / $8,000 income = 25% already taken up
Under the current tightened ratio of 55%, we only have 55% - 25% = 30% left
If Bob wants to apply for a property loan, he will only have = 30% x $8,000 = $2,400 left a month for property monthly loan repayments
This essentially limits the number of items you are purchasing on loans since the maximum of loans repayable you can make across every item can only add up to 55% of your monthly income.
That being said, do note that the TDSR threshold for refinancing existing property loans that were granted before 16 December 2021 will still remain at 60%.
How will TDSR and MSR affect your purchase?
To put things simply, MSR limits the amount of money you are able to borrow based on your gross monthly income. They do not look at what other loans you have, and solely focus on your income-to-monthly-payment ratio.
However, TDSR considers all of your loan repayments and places a threshold on how much more you can loan based on that percentage.
While the effects of both are the same, one focuses on income and the other focuses on total loan repayable.
Another thing to note is that MSR only applies to buyers of HDB property and ECs, while TDSR applies to all property loans, public or private.
What you should do moving forward
With TDSR and MSR to take into consideration, relook at what is your commitment level and which property type is the best for you at your current financial standing.
While greater caution must be practiced when considering which units to buy, the benefits and growing value of properties are definitely still there. As long as you make an informed decision through ample analysis and research, your profit margins will remain secured.
If you need professional advice or wish to get the latest property information and updates, reach out to Kaeden Ong directly.
The above is written by Kaeden Ong. To know more, contact him at +65 9048 0660.
The information provided is for generation information purposes only and does not have regard to specific investment objectives, financial situation and the particular needs of any recipient hereof. No information here should be used as legal, taxation or investment advice.