What is the Total Debt Servicing Ratio (TDSR), and why?

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Real estate investment has always been one of the instruments to help people grow their wealth and multiply their fortune.

Investing in real estate has many advantages compared to most types of investments, such as bonds, stocks, mutual funds, options, gold, etc.

Many savvy property investors out there will know that one of the key benefits of real estate investment is “leveraging”.

Let me share with you an example:

John bought a 2-bedroom unit at $1M. Being his first property, he was able to take up a loan of 80% (i.e. $800,000)
Thus his cash outlay will only be $200,000 (excluding legal fees and stamp duty etc.)

A few years later, John was able to sell off his property for $1.2M, a handsome profit of $200,000.

A simple calculation of return on investment will be – “(gain from investment) / (cost of investment)”
Equates to ($200,000/$200,000) x 100 %.

John’s returns will be 100%, isn’t that great?

Because John was able to leverage on the financial support from the bank, he only needs $200,000 cash to make a $200,000 profit.

Instead of having to fork out a huge sum of $1M for his real estate investment.

Sounds good?

However, the Singapore government made a decision to cool the demand & heat for such activities and came up with their next cooling measure.

On 28 June 2013, the Monetary Authority of Singapore (MAS) introduced a Total Debt Servicing Ratio (TDSR) framework for all property loans granted by banks to individuals, with effect on 29 June 2013.

Official press release from MAS: MAS Introduces Debt Servicing Framework for Property Loans

What is the TDSR about?

With this new framework, banks will look deeper into your financial capabilities, looking into your various debts such as car loans, credit card bills, and other mortgage loans, etc.

This is to ensure that with the borrower’s total debt obligations every month, even when using a lesser percentage (compared to previous) of the borrower’s monthly gross income, he/she will be able to service the new mortgage loan which is being applied for.

TDSR Article
A warning sign to the nation

In a nutshell, a borrower will be subjected to a more stringent credit assessment.

Therefore it’s no longer going to be easy lending money from the bank for your property purchases.

Even if the loan is being approved, the borrower may not be able to get as much loan as he/she would desire (thus having to come up with more cash outlay), or even may not be able to stretch the loan tenure (which makes the monthly loan repayment an even larger amount).

But of course, if you’re cash-rich, it doesn’t really bother you that much.

Why TDSR?

In 2008, the world was shaken by the largest bankruptcy filing in U.S. history by Lehman Brothers.

Why did they fall?

One of the main reasons was over-leveraging. The debt was too much for them to handle. On top of that, they were dishing out loans easily at low-interest rates and eventually weren’t able to recover them.

With the property marketing heating up in Singapore (especially in the new launch condo market), the government felt that they had to do something about it before things go beyond their control.

We spoke to experts from the financial institutions (FIs), and indeed, 8 out of 10 property buyers barely made the mark to get their loans approved before the cooling measure.

These are the so-called “marginal buyers”.

If the market really turns bad (e.g. interest rates rise), they may not able to service their outstanding mortgage and end up force selling their property.

In my opinion, with the TDSR in place, we can expect more stability in Singapore’s property market. Even during bad times, the market will be strong enough to tide through.

In the present market, you can be pretty sure that most property buyers today will have holding power and are financially strong (if not how could they have passed the stringent assessment from FIs?).

Therefore, don’t expect a huge fluctuation in property prices from now on.

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