Introduced in 2013, the Total Debt Servicing Ratio (TDSR) was intended to “strengthen credit underwriting practices by financials institutions”, and to “encourage financial prudence among borrowers”. In other words, to stop banks handing out cash like candy, and to make it less likely for borrowers to make risky speculative investments.
For a refresher, the TDSR is generally calculated as 60% of your gross income. That is to say, if your gross monthly income is $10,000, the total loan servicing amount for your loan is $6,000.
If you are an active investor, it’s even less favourable, as a significant portion of your income is likely from your investments rather than a salary. In this case, there is a 30% reduction of your gross monthly income. So if your average gross monthly income is $10,000, your TDSR will be calculated from 60% of $7,000, which is $4,200.
The TDSR was well intentioned, and has succeeded in its efforts to have banks cool the housing market to a more manageable level for the average Singapore home buyer. After all, it was reported that up to 10 percent of Singaporean mortgage holders were borrowing beyond their means. However when it comes to knowledgeable accredited investors in Singapore, it has left a lot to be desired.
Any informed accredited investor will leverage debt to generate returns; however when it comes to borrowing from a bank, the TDSR has limited the effectiveness of this tenet of investment in several ways.
1. Investing in Property Simply Isn’t as Easy as It Used to Be
While the need to curb hurried and speculative property investment was well meaning, the overarching principles of the TDSR also limits savvy investors. If you already have an existing home (or likely more than one home loan), a bank probably won’t let you take out another home loan without going over your TDSR of 60%.
This will of course depend on what your existing debt levels are with these loans, but the point remains that a savvy investor will be aware of their risks, and should not be held back by a one-size-fits all policy by banks.
2. Even If You Are Debt Free, Your Borrowing Capability Is Reduced
Death, taxes, and fluctuating interest rates. The bank must take all of these into account, and in the case of interest rates, they are required to subject you to a “stress test” to see if your finances can handle any dramatic spike in interest rates.
Specifically, this means that investors but be able to maintain their 60% TDSR if residential interest rates were to rise to 3.5%, and commercial interest rates were to rise to 4.5%. This means even if you have no debt, the amount you can borrow is reduced regardless.
While we concede it’s rare that an active investor will be debt free, this is still a good example of the restriction on investment opportunities.
3. Investors with Variable Income Are Limited Further
As we mentioned earlier, it’s likely than an active investor will not be just reliant on a fixed salary. Much of an investor’s income may come from rental properties, shares, or dividends. Under the TDSR rules, this means that banks can only treat this variable income as though it’s 30% less than what it actually is.
This doesn’t just apply to wealthy investors either, it also affects business owners and those in the rapidly growing gig economy, such as freelancers.
Such a clear disadvantage for those who are actively working to invest their money seems counterproductive, despite its well meaning intentions to limit too much risk.
4. Now, You Might Just Be Too Old to Borrow
When creating a property loan, a bank is obviously going to want to know that you’ll live long enough to pay off said loan. If you are 58 years old, they aren’t likely to give you a 30 year loan term.
To circumvent this, you used to be able to make a joint loan application to a bank with somebody younger, let’s say one of your children. Banks would use only the age of the younger applicant, which not only helped you get a loan, but helped finance your child into the property market.
Now however, banks take the average ages of the joint applicants, which raises the ‘applicant age’ significantly. All of a sudden it’s harder for an investor to create a nest egg, and harder for younger people to get their own home.
5. Time Sensitive Investments Are Harder to Execute
Every investor dreams of having that perfect opportunity fall into their laps. And when that opportunity arrives, you need to be able to move swiftly to secure your piece of the pie.
However with TDSR, you are very unlikely to be able to collate all of the bank’s required paperwork within the same month, let alone the same week as a quick investment opportunity. You now need to provide every statement under the sun, from personal purchases, gym memberships and credit card balances. And woe is you if you have variable income, because it just gets more complex from there.
This makes the borrowing process so much more complex and time consuming, that any chance of pulling off a time sensitive investment by borrowing from a bank is all a bit less likely.
What You Can Do About It
There are obvious ways to improve your TDSR, that won’t really come as a surprise to any savvy investor:
- Reduce your monthly loan commitments. Pay off as much debt as possible, whether it be car loans, credit cards, or student loans.
- Look into your assets such as gold, stocks, or shares that can be seen as extra income streams by your financial institutions. This will increase your monthly income, therefore bringing down your TDSR.
If you are a Singapore accredited investor however, there is a third option available to you that can alleviate you of TDSR restrictions.
Can a Singapore Accredited Investor Be Exempted from TDSR?
If you are a Singapore accredited investor, you can in fact be exempted from TDSR if you borrow from a registered, private funder.
A registered, private funder is not hindered by the Money Lending Acts, even though they are licenced by the Monetary Authority of Singapore (MAS).
MAS allows such private funders to loan money to accredited investors that would otherwise exceed their TDSR, by using collateral.These private funders are also allowed to bypass TDSR without collateral, however they are unlikely to for risk management reasons.
So if you have enough assets to offset your TDSR as collateral, you can bypass TDSR restrictions all together.
This gives them a lot more flexibility and scope to accurately assess whether your investment is a prudent one, rather than being limited by a structure that assumes you can’t afford it.
We must stress though, that while attractive, this private funding option to avoid TDSR restrictions is only available to Singapore accredited investors.
Conclusion — How to Avoid TDSR in Your Investments
While it’s clear that the TDSR was designed to protect the average investor, the average investor doesn’t have the knowledge of an experienced accredited investor. With your experience, a registered private funder might just be your best option for flexible borrowing options for your next investment.
If you are a Singapore accredited investor and would like to see if you can be exempt from TDSR, apply for funding with Rikvin Capital today.
About Rikvin Capital
Rikvin Capital Pte Ltd is a registered private funder under the Moneylenders Act (Cap. 188).We specialise in fast and flexible funding to accredited investors and business with secured loans. Funding can range up to 25 million dollars, with a loan to value ratio of up to 70%. Based in Singapore, Rikvin Capital also services the United Kingdom, and other markets upon request.
Due to their independent nature, we pride themselves on tailoring funding solutions to all imaginable investment needs. If you’d like to seek out borrowing opportunities for your investments, you can apply for funding now.
Frequently Asked Questions
As defined by Section 4A of the Securities and Futures Act, an accredited investor is:
• whose net personal assets exceed in value the minimum amount of $2 million (or its equivalent in a foreign currency) and in determining whether an individual’s net personal assets exceeds the minimum amount, the estimated fair market value of an individual’s primary residence less any outstanding amounts, shall not account for more than $1 million (or its equivalent in a foreign currency) of the minimum amount; or
• whose income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency)
Example: If your primary residence in Singapore is valued at $7 million and you have an outstanding mortgage of $3 million, your net equity on your primary residence would be $4 million. That does not automatically qualify you as an Accredited Investor as your primary residence can only account for $1 million.
However, if you have a second property or an investment property valued at $1 million with no outstanding mortgage, your net personal asset value would meet the minimum criteria of $2 million as set out by the SFA and you will qualify as an Accredited Investor.
Yes, if you have financial assets that are held overseas, it can contribute towards your Accredited Investor status. A market value assessment of each financial asset will need to be undertaken in order to verify the amount of such assets.
Example: If you have an investment property in Malaysia worth RM$10 million, you could use the property to contribute towards your Accredited Investor status in Singapore by converting the value to SGD$3.3 million.
A primary residence simply means the home in which you live in most of the time. This can be located in Singapore or overseas. If your primary residence is located outside of Singapore, you would need to convert the market value into SGD.
For Singapore Citizens and Permanent Residents, it is relatively easy to prove that your income in the preceding 12 months is not less than $300,000. Simply provide the following:
• Latest Notice of Assessment (NOA)
• Last 12 months’ original computerised salary slip
• Last 12 months’ CPF contribution statement
These documents would be sufficient to prove that your income is more than $300,000 and that you are an Accredited Investor.
Rikvin Capital is a private finance company that falls under the term “Excluded Moneylender”. Under Section 2 of the Moneylenders Act, an excluded money lender is any person who:
• Lends money solely to his employees as a benefit of employment
• Lends money solely to Accredited Investors within the meaning of Section 4A of the Securities and Futures Act
• Lends money solely to
○ Limited liability partnerships
○ Trustees or trustee-managers, as the case may be, of business trusts for the purpose of the business trusts
○ Trustees of real estate investment trusts for the purposes of the real estate investment trusts, or who carries on any combination of such activities or services
Hence, in order for Rikvin Capital to be treated as “excluded moneylenders”, the company can only lend to Accredited Investors and Corporations.
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