Non-Mortgage debt servicing Ratio

Why is this ratio important to managing our finances? 

This situation will be familiar to many of us when we go shopping at the malls or what is more popular nowadays, online shopping platforms.

John and Mary walk into Raffles City, and wondered if they could afford the items at the audio or boutique shops, pulling out their credit cards to purchase that state-of-the-art sound system or that branded leather bag that cost $5,000 and put it on instalment payment?

Non-Mortgage Debt Servicing Ratio =

Total Monthly Non-Mortgage Debt Repayments / Monthly Take-Home Income 

The non-mortgage debt servicing ratio will be able to help you make that decision if you can afford it. This ratio shows how much of a person's take- home income goes towards non-mortgage debt repayment. Generally, a ratio of 15% or below is safe.

So, what is our take home pay? This is the amount that goes into your bank account after you less off your 20% CPF contribution

What is non-mortgage debt? This are debts could be from our study loan, credit card debt (even those that are on interest free instalment payments), car loan, personal loan, and other non-mortgage related debt. These debts generally carry a higher level of interest rates compared to mortgage loan.

Example: John graduated 2 years ago and is currently earning a gross salary of $5,000/month. he has a study loan of $500/ month that he is paying. His current ratio after applying the formula: Non-Mortgage Debt servicing Ratio= $500/ $4,000 ($5,000x0.80)= 13%

If he decides to purchase the sound system that cost him $5,000 and put it on his credit card on 24 month interest free installments ($5,000/ 24 month= $208/ month), applying the same formula, his ratio will go up to: Non-mortgage Debt Servicing Ratio= $500 (study loan) + $208 (sound system)/ $4,000 ($5,000 x 0.80) = 18%!!

A high ratio would mean that he is excessively borrowing too much to finance his lifestyles and potentially could be in financial distress if he loses his job. He could defer his purchase, delay gratification, save up the $5,000 and pay for it fully, purchase it after he completes paying off his study loan or even after he earns a higher income. 

The saying of "living within your means" cannot be truer in this situation.