Singapore’s property market has long been known for its stability and resilience, but behind this reputation lies a framework designed to safeguard both borrowers and the financial system. At the heart of this framework is the Total Debt Servicing Ratio (TDSR), a regulatory measure introduced in 2013 to ensure borrowers do not overleverage themselves. Let’s understand what TDSR is, how it works, and its impact on the property market.
What is TDSR?
TDSR is a financial framework implemented by the Monetary Authority of Singapore (MAS) to prevent individuals from overleveraging themselves when taking on debt, particularly for property purchases. It calculates the percentage of a borrower’s gross monthly income that can be used to service all outstanding debts, including mortgages, car loans, and credit card debt.
How Does TDSR Work?
Under TDSR ruling, financial institutions must ensure that borrowers’ total monthly debt obligations do not exceed 55% of their gross monthly income. This includes not only the mortgage payment but also any other outstanding debts. Additionally, lenders are required to incorporate a buffer into their calculations to account for potential increases in interest rates. Base rates or stress test rates are used to calculate a prudent loan amount that a financial institution can lend to an individual. The rate recommended by the MAS is a minimum of 4%, with variation in the rates from bank to bank.
To calculate TDSR, lenders consider all sources of income, including salary, bonuses, rental income, and investment dividends, while accounting for all existing debt obligations. If a borrower’s TDSR exceeds 55%, the lender may limit the loan amount or require a larger down payment to bring the borrower’s debt levels within the acceptable range.
Impact on the Property Market
Since its implementation, TDSR has had a significant impact on Singapore’s property market, particularly on mortgage lending and housing affordability.
Responsible Lending: TDSR promotes responsible lending practices by ensuring that borrowers can afford their mortgage payments even in adverse economic conditions or when interest rates rise. This helps mitigate the risk of default and prevents a housing bubble from forming. Furthermore, this would prevent the history of property price crashes from happening, as a result of financial crisis.
Cooling Property Prices: TDSR has contributed to cooling property prices by curbing speculative buying and preventing buyers from overstretching their finances. With stricter lending criteria, potential buyers are more cautious, leading to a more sustainable property market.
Impact on Borrowers: While TDSR protects borrowers from overborrowing, it also means that some individuals may find it harder to qualify for loans, especially if they have existing debts or limited income. This has implications for housing affordability, particularly for first-time buyers or those with lower incomes. An additional prudent approach is also taken for individuals who do not earn fixed incomes, and the financial institutions will have to take a minimum haircut of 30% on variable income earners (i.e. commission earners, trade income etc.)
Market Stability: By ensuring borrowers can withstand economic fluctuations and interest rate hikes, TDSR contributes to overall market stability. It reduces the likelihood of a housing market crash or financial instability caused by excessive debt.
Future Outlook
As Singapore’s property market continues to evolve, TDSR remains a critical component of the regulatory framework. While it has been effective in promoting financial prudence and stability, policymakers continuously monitor its impact and may make adjustments as needed to ensure a balanced property market.
In conclusion, Singapore’s Total Debt Servicing Ratio (TDSR) plays a crucial role in maintaining the stability and sustainability of the property market. By promoting responsible lending and preventing borrowers from overextending themselves financially, TDSR helps safeguard both individuals and the broader economy. The implementation of TDSR has resulted in a less-speculative property market in Singapore, where property prices are increasing steadily within the economic fundamentals. While it may pose challenges for some borrowers, its long-term benefits contribute to a resilient and healthy property market in Singapore.
