Should You Borrow More? Total Debt Servicing Ratio and Your Housing Loan

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How much will you get for your housing loan? For aspiring homeowners, the answer is a crucial part of financial planning. The loan amount can be a deal-breaker for a lot of first-time homebuyers.

Often, you are not quite sure if it’s better to apply for a smaller or bigger loan. That’s why it is imperative to understand whether you are ready to take a leap towards this milestone. Know the factors to consider when buying your dream home.

Our answer?

It’s Better to Get a Smaller Housing Loan Amount

You can save interest rates on your HDB housing loan by minimising the loan amount.

Aside from taking a smaller loan amount from the start, you can also make partial capital repayment when you have the funds.

How do you save when taking a smaller housing loan amount?

Let’s look at an example scenario of taking a $250,000 versus $200,000 loan amount.

Let’s say the loan tenure is 25 years at 2.6% interest:

$250,000 loan

  • Monthly payment – $1,135
  • Total payment over 25 years – $340,500
  • Total amount of interest paid – $90,500

$200,000 loan

  • Monthly payment – $908
  • Total payment over 25 years – $272,400
  • Total amount of interest paid – $72,400

The interest savings that you get from getting the smaller loan is $18,100.

This amount is more than enough for a kitchen makeover of your love nest.

You need to be strategic about the home financing. Just because you can afford the monthly repayment, it does not mean that you should get the maximum loan amount available. Apparently, this is the same line of thinking by the government, which has implemented measures to encourage financial prudence among borrowers.

How does the government ensure financial prudence?

The Monetary Authority of Singapore (MAS) sets a maximum threshold for borrowers, which is the Total Debt Servicing Ratio (TDSR).

Financial institutions (FI) must compute the TDSR of borrowers who apply for property loans and ensure that the borrowers’ monthly repayment for all debts does not exceed 60% of their monthly income.

Why is TDSR required?

Property loans can be large, long-term liabilities for most individuals and households. TDSR limits ensure that borrowers are not over-leveraged for property purchases. This means that after monthly contributions, homeowners still have enough money to maintain a comfortable lifestyle.

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