Budgeting for Your Dream Home: Understanding TDSR and MSR

Singapore's real estate market has remained remarkably stable despite the rising interest rates as well as global crises like pandemics and wars. This strength is largely attributed to robust measures like Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) that promote affordability and prevent excessive borrowing.

These ratios play a critical role in maintaining a sustainable market. Limiting debt levels prevents a property bubble from inflating, which contributes to long-term market health. Additionally, they protect both borrowers and lenders. Borrowers are shielded from taking on unsustainable debt burdens, and lenders experience reduced risk of defaults and foreclosures, even during economic downturns.

Even so, purchasing a property still requires meticulous financial planning on your side (even if you're crazy rich!). The good news is that you can be a homeowner without jeopardising your financial well-being. Understanding these debt ratios can help you establish a good foundation for a sustainable property journey and even maximise your returns. So, if you're ready to turn your dream of home ownership into reality, keep reading! We'll unveil all the necessary details and help you put this knowledge to good use.

What are TDSR and MSR?

Total Debt Servicing Ratio (TDSR) is a ratio that limits your total monthly debt obligations to a maximum of 55% of your gross monthly income. Monthly debt includes all your outstanding debt obligations such as housing loans (including the loan being applied for), car loans, student loans, personal loans, credit card bills and any other secured or unsecured loans. Gross monthly income refers to your monthly income before tax and excludes any CPF contribution made by your employer.

In certain cases, exemptions can be made. So, you don't need to worry about exceeding the TDSR limit in the following circumstances:

• You are refinancing your existing home (must be owner-occupied)
• You are getting a small loan secured by multiple properties (as collateral), of which the total market value is less than half the loan amount 
• You are getting a bridging (short-term) loan that you'll pay back within 6 months
• You are getting a loan for a property where you're borrowing less than half its value (loan-to-values under 50%)

Mortgage Servicing Ratio (MSR) specifically focuses on your housing loan repayments. It restricts the monthly instalments for your property loan (including the one you're applying for) to a maximum of 30% of your gross monthly income. This applies only to HDB flats and Executive Condominiums (EC) where the Minimum Occupation Period (MOP) has not expired.

How TDSR and MSR impact your budget

Both TDSR and MSR play a significant role in determining your affordability when buying a property in Singapore. On the one hand, TDSR sets a limit on your total debt burden so you don't overextend yourself financially by taking on more debt than you can comfortably manage. On the other hand, MSR focuses on housing affordability so your mortgage payment remains manageable within your overall budget. By understanding these ratios, you can set realistic goals for your property search and determine a price range that aligns with your income and existing debts.

That said, make sure to calculate your TDSR and MSR before starting your property search. You can also use PropNex's online calculator to simplify this process. If your TDSR and MSR are too high, you should explore these options:

• pay down existing debts to improve your borrowing capacity and potentially qualify for a larger loan
• refinance your existing loans with a lower interest rate to reduce monthly repayments
• look for ways to generate additional income such as freelance work or renting out spare rooms
• consider a smaller and/or cheaper property

Ultimately, understanding TDSR and MSR is a critical step in effectively managing your debt and budgeting strategically within these limitations. If you're still unsure, you can consult a financial advisor or link up with us to receive personalised guidance on managing your debt and maximising your borrowing power within the TDSR and MSR limits. With careful planning and informed financial decisions, you can set yourself up for a secure and rewarding home ownership journey.

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