“Explore possible loan refinance” – Tharman tells high-indebted households

In response to a parliamentary question, Chief Minister and Minister in charge of MAS Tharman Shanmugaratnam said: “Borrowers who have difficulty in servicing their mortgages should approach their lenders early to explore possible loan refinancing and repayment options.

The Chief Minister was responding to a parliamentary question asking, “Given the recent increase in interest rates, what is MAS’ assessment of the risk of default by borrowers on loans funded by variable rate loans offered by local banks.

Mr. Tharman, in answering the question, said:

“The household debt situation in Singapore remains healthy overall and is expected to remain so in a rising interest rate environment…(but) there will be a small segment of households that are more highly indebted and more severely affected by rising interest rates (and) borrowers who are having difficulty repaying their mortgages should contact their lenders early to explore possible solutions for refinancing and loan repayment.

“The household debt situation in Singapore remains healthy overall and is expected to remain so in the rising interest rate environment we face.

“The median Total Debt Service Ratio (TDSR), which measures the proportion of income spent on debt repayment, is 43% for new mortgages issued in the past year, well below the threshold regulatory 55%. The share of non-performing mortgages in overall outstanding mortgages also remained low and stable at less than 1%.

“The average loan-to-value ratio of outstanding mortgages granted by financial institutions is below 50% in the first quarter of 2022, suggesting that households generally have significant positive net equity in their residential properties. Household cash deposits have also grown faster than their liabilities, improving their ability to meet immediate debt repayment obligations.

“The overall financial resilience of households to service their mortgages reflects the measures MAS has put in place over the years.

“(a) The interest rate used to calculate loan repayments under the TDSR is the greater of 3.5% or the prevailing market rate. This rate has provided a buffer against interest rate increases for borrowers who have taken out a mortgage in the past.

“(b) LTV limits and loan term restrictions have also encouraged greater financial prudence among mortgage borrowers.

“Looking ahead, the MAS stress tests suggest that most households, including borrowers on variable rate packages, should be able to service their debt even under conservative loss scenarios. significant revenues and full pass-through of sharp increases in global interest rates.

“That said, there will be a small segment of households that will be more highly indebted and will be more severely affected by interest rate increases. Borrowers who are having difficulty servicing their mortgage should approach their lenders early to explore possible solutions for refinancing and loan repayment.For HDB homeowners in financial difficulty, MAS worked with MND, HDB, MOM and financial institutions to establish standardized responses to late repayments.

“These include potential loan restructuring solutions, early referrals to appropriate social service agencies and, in some limited cases, helping landlords secure alternative HDB housing where foreclosures are unavoidable.

“MAS urges everyone to exercise caution in any new borrowing. Households should assume that there will be further interest rate hikes over the next year at least, and be sure of their ability to service their loans before making additional commitments.

— Mr. Tharman Shanmugaratnam, Minister of State and Minister in charge of MAS

With rising global interest rates, higher borrowing costs for home loans are inevitable.

SORA to Rise as International Borrowing Costs Rise

Our national benchmark interest rate – the Singapore Overnight Rate Average (SORA) – is expected to rise in line with US rates. But for now, mortgage interest rates are still hovering competitively around 1.65-2.35%, but will continue to rise throughout 2022.

The way the FED raises interest rates works is to make loans more expensive and, technically, should lead to reduced spending. The move will put pressure on financial institutions in Singapore to raise interest rates as well, which is why homeowners should explore possible loan refinancing.

Since most home loan rates are now pegged to SORA, you won’t see interest rates rise too prematurely relative to the US federal funds rate. Indeed, although the SORA is a look-back interest rate mechanism that reacts to interest rate movements in Singapore, changes in the US federal funds rate have global repercussions. SORA should therefore react accordingly.

The biggest rise in US interest rates will certainly dampen some of the excitement in the buoyant real estate market and could pose a big problem for homeowners who continue to pay down their mortgages. This is because banks and financial institutions calculate lending rates by adding a margin (which covers their costs and profits) to a published financial index, such as SORA.

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