The Total Debt Servicing Ratio (TDSR) is essential in determining whether you’re eligible for the mortgage loan. Failure to meet the 60% TDSR threshold would render your mortgage application loan unqualified.
TDSR restricts the amount you can borrow to finance your property loan to 60% of your gross monthly income. This takes into account your other financial commitments.
TDSR = (total commitments) / (total income) = ≤ 60%.
How to meet the 60% TDSR threshold
If you failed your TDSR, it could be that your financial commitments are too high, or your income is insufficient to support your financial commitments.
To boost your TDSR to meet the 60% threshold, you can choose to reduce your financial commitments or increase your income.
Reducing your financial commitments
First, let’s talk about how you can reduce your financial commitments.
You can pay off any outstanding personal loans, car loans and credit card bills etc. Though these may seem to amount to a hefty sum, offloading these debt obligations will increase the maximum amount of housing loan you can borrow significantly.
This will make it a beneficial trade-off in the long run.
Increasing your income
Next, let’s discuss how you can increase your income.
You may also include any monthly rental income you receive as your additional income. However, not the full value of the above-mentioned sources of income will be recognised.
The breakdown of income recognition is as follows:
|Source of Income||Percentage Recognised|
|Cash / Fixed Deposits (pledged)||100%|
|Cash / Fixed Deposits (unpledged)||30%|
|Unit Trusts (pledged)||70 – 100%|
|Unit Trusts (unpledged)||30%|
If the liquid assets are pledged with the bank, the liquid assets have to:
- Be with the same bank that you’re obtaining the mortgage loan from
- Be pledged with the bank for 4 years (48 months)
If the liquid assets are unpledged, the liquid assets have to:
- Be with the same bank that you’re obtaining the loan from
- Be shown to the bank twice – during the loan application and before loan disbursement
Here’s an example
Caleb, aged 40, draws a fixed salary of $4,000 and has a personal loan of $500 per month.
Claire, aged 38, draws a fixed salary of $10,000 and has a car loan of $1,500 per month.
Caleb and Claire are jointly purchasing their first private property for $2,000,000 and are taking up a 75% loan. They’ll have to pay a monthly instalment of $7,329 for the housing loan based on the calculation below:
TDSR = (total commitments) / (total income)
= ($500 + $1,500 + $7,329) / ($4,000 + 10,000)
= $9,329 / $14,000
Since their TDSR exceeds the 60% threshold, Caleb and Claire fail TDSR.
What to do when you fail your TDSR?
Based on the above example, Caleb and Claire can choose to pledge cash with the bank to qualify for the mortgage loan.
To calculate the amount of cash the couple needs to pledge, we shall work backwards:
Income required to pass TDSR = $9,329 / 0.6 = $15,549
Income shortfall = $15,549 – $14,000 = $1,549
Cash (Pledged) = $1,549 x 48 = $74,352 = $75,000
Therefore, Caleb and Claire would need to pledge a minimum amount of $75,000 to qualify for the mortgage loan. On the other hand, the unpledged method will amount at $75,000 / 0.3 = $250,000, and will need to be shown to the bank twice — during the loan application and before loan disbursement.
TDSR exemptions for refinancing
If you’re refinancing your owner-occupied property loans, you’re exempted from the 60% TDSR threshold if you pass your financial institution’s credit assessment.
If you’re refinancing your investment property loans, you’re exempted from the 60% TDSR threshold if you pass your financial institution’s credit assessment. You also have to pay down 3% of the outstanding loan in cash.
In fact, you may be granted up to an 80% – 100% TDSR threshold for both owner-occupied and investment property loans if you meet the above-stated stipulated conditions.
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