Published October 06, 2012

MAS imposes cap on housing loan tenures

Absolute limit of 35 years set for new, refinance mortgages, loan-to-value ratios for certain new loans also tightened

By emilyn yap and mindy tan

SINGAPORE regulators signalled their concerns over still rising home prices yesterday, announcing fresh mortgage curbs to cap upward price pressures caused by low interest rates and fast credit growth.

The Monetary Authority of Singapore (MAS) said it will set an absolute limit of 35 years on the tenure of all residential property loans - both new loans and refinancings. It will also lower loan-to-value (LTV) ratios for new loans with a tenure of more than 30 years. The new rules will apply to both private homes and HDB flats and will take effect today.

"Monetary conditions worldwide are far from normal," said Deputy Prime Minister Tharman Shanmugaratnam, noting that the latest round of quantitative easing (QE3) in the United States and low interest rates have made credit easy, though this will eventually change.

"We are taking this step now to require more prudent lending, and will continue to watch the property market carefully," said Mr Tharman, who is also Finance Minister and MAS chairman. "We will do what it takes to cool the market, and avoid a bubble that will eventually hurt borrowers and destabilise our financial system."

The new rules - Singapore's sixth round of cooling measures - look set to affect not just home buyers and existing owners looking to refinance their mortgages, but also property developers and banks.

According to the central bank, over 45 per cent of new home loans have tenures exceeding 30 years.

"We will not be surprised to see more measures being introduced if property prices do not stabilise (or correct slightly) over the next few months," said Barclays Capital economist Leong Wai Ho.

MAS will cap the tenure of all new residential property loans at 35 years

For refinancings, the tenure of the refinancing facility and the number of years since the first home loan for that property was disbursed cannot add up to more than 35 years.

Also, MAS will lower the LTV ratio for new home loans to individual borrowers if the tenure exceeds 30 years, or the loan period extends beyond the retirement age of 65 years.

The LTV will be 60 per cent for a borrower with no outstanding residential property loan, compared with 80 per cent previously, and 40 per cent for a borrower with one or more outstanding home loans, compared with 60 per cent before the new rules.

For non-individual borrowers, the LTV ratio for home loans will be lowered to 40 per cent from 50 per cent.

The MAS move comes after the Hong Kong Monetary Authority announced a 30-year limit on the maximum term of all new mortgages last month, following the launch of QE3. With the Federal Reserve looking to pump US$40 billion into the US economy each month until sustained jobs growth kicks in, worries about hot money inflows into Asia and asset price inflation have again emerged.

Stretched tenures

Previous rounds of cooling measures had a moderating effect on home prices in Singapore, and a significant supply of housing will also come onstream in the next two years, MAS noted. "However, prices in both the HDB resale market and private residential property have continued to rise in Q2 and Q3 of 2012."

According to official flash estimates on Monday, HDB resale prices rose 2 per cent in Q3 from Q2, while private home prices gained 0.5 per cent over the same period. Separately, the SRX Residential Property Flash Report yesterday showed resale prices of non-landed private homes rising 3.2 per cent in Q3.

Low interest rates globally and locally are likely to persist and will continue to spur residential property demand, pushing up prices beyond sustainable levels, MAS warned, stressing that "the eventual correction could be painful to borrowers and destabilise the economy".

Meanwhile, financial institutions have stretched the durations of home loans, and long tenure loans pose risks to both lenders and borrowers, the central bank said. The average tenure for new residential property loans climbed to 29 from 25 years over the last three years, it revealed. Also, more than 45 per cent of new home loans granted by financial institutions have tenures exceeding 30 years.

Lower initial monthly repayments from long loan tenures and low interest rates may cause borrowers to overestimate their loan servicing ability and take a bigger loan than they can afford, MAS said. In fact, long tenure loans create a larger debt repayment burden as interest accumulates over a longer period.

"When interest rates eventually rise, borrowers who have overextended themselves will have difficulties repaying their loans," MAS said. "If property prices fall, financial institutions may be caught holding the bad loans."

Banks which offer home loans with a tenure of over 35 years will feel the impact of the new rules almost immediately. DBS and OCBC are among those providing mortgages stretching up to 40 years.

"We will reduce our existing maximum home loan tenure of 40 years to 35 years, with immediate effect," said OCBC group corporate communications head Koh Ching Ching.

A DBS spokeswoman said that most of the bank's home loans have a tenure of under 35 years. "It will take some time to ascertain the impact of the new measures while homebuyers assess the market."

Resale impact

United Overseas Bank (UOB), which introduced 50-year housing loans in July, did not respond to media queries. Some market watchers then had questioned if the product would cause borrowers to overextend themselves, and National Development Minister Khaw Boon Wan subsequently called it a "gimmick".

Maybank said its maximum loan tenure for home loans is 35 years. "With an ageing population and couples marrying and setting up home at a later age, the new rules will have impact on these segments," said Alan Yet, head of lending (consumer banking) for Singapore.

The jury is out on how the new rules will affect the residential property market. The Real Estate Developers' Association of Singapore (Redas) does not expect a significant impact. "Based on past experience, not many buyers take long tenure loans," it said. Just last week, Redas said the property sector does not need more cooling measures - at least not before a thorough review of the impact of earlier policies.

Jones Lang LaSalle South-East Asia research head Chua Yang Liang believes that the new rules may be more keenly felt in the secondary market, particularly for buyers with existing housing loans as the lower LTV applies to them.

"The property market is likely to see a knee jerk reaction with a slowdown in resale activity while new sales should remain fairly stable," he said. "Given the potential economic slowdown and with this new policy risk, developers are likely to adopt a more cautionary stance and land bid prices could be more modest."