Non-Mortgage Debt Servicing Ratio <=15% take-home income.
Why should we do this?
Having too much debt means we may not have enough for ourselves or your loved ones to spend or to save.
If interest rates increase, we may not be able to service our debt without reducing savings rate or worse, we may have to sell off assets (possibly at a loss).
We may not want to start investments until we reduce high-interest debt and debt levels.
Our recommended Total Debt Servicing Ratio (TDSR) is “stricter” than the banks' because it is good to build some buffer.
How do we do it?
Formula for Total Debt Servicing Ratio: Total monthly debt payments/ Total gross income
Formula for Non-Mortgage Debt Servicing Ratio Monthly non-mortgage debt payment/ Take-home income* *Take home income = Gross salary – CPF contributions = 0.8 x Gross Salary
Example
I have a gross monthly salary of $4,000 and take home $3,200 after CPF contributions.
I pay $800 towards my HDB mortgage using my CPF OA and pay another $300 in cash towards my renovation loan each month.
Total Debt Servicing Ratio = ($800 + $300)/$4,000 = 27.5% of gross salary (<=35%).
Non-Mortgage Debt Servicing Ratio = $300/$3,200 = 9.4% of take home income (<=15%).
Attention
Consider Buy Now, Pay Later (BNPL) payments as part of the numerator for these ratios.
BNPL tends to cause us to over-estimate our spending power and puts us at risk of rolling them over into actual debt.
