Primary Inhibitions Precluding Local Banks Offering Longer Fixed-Rate Mortgage Loans

Assoc Prof Jamus Jerome Lim asked the Prime Minister whether the Government has (i) engaged local banks to understand what the primary inhibitions are that preclude longer fixed rate mortgage loans from being offered and (ii) conducted any studies on whether the absence of a separate, Government-backed home mortgage company has inhibited local banks from offering longer fixed-rate mortgages.

The benefits of longer-term fixed-rate mortgage loans do not necessarily outweigh their costs and risks to borrowers. There are two pertinent considerations.

First, mortgage loans with a longer period of fixed rates offer repayment stability but could come at higher costs over the lifespan of the loan. Financial Institutions (FIs) offering fixed-rate loans bear the risks of interest rate volatility and higher opportunity cost of funds when rates rise and will price them at higher interest rates than floating rate loans. This can already be observed in the market today. For example, the introductory rates for a two-year fixed rate mortgage loan offered by the local banks currently range from 3.5% to 3.75%, higher than those for floating rate mortgage loans of about 3% offered by the same banks.

Second, borrowers may not have as much flexibility to refinance their loans when interest rates fall, as longer-term fixed-rate loans come with longer lock-in periods. Whether the longer-term fixed-rate loan benefits the borrower depends on the interest rate conditions when the loan is taken up. In a period of higher and more volatile interest rates, such as what we face currently, borrowers who enter into longer fixed-rate terms are at risk of being locked in at such higher rates, for a longer period. This means that should interest rates eventually decline, these borrowers may not have the option to refinance out of their loans or may have to incur substantial costs in doing so.

Local banks, currently, offer a range of mortgages with rates that are fixed for up to five years. According to the banks that the Monetary Authority of Singapore (MAS) has engaged, these offerings reflect customer preferences. Borrowers, generally, prefer near-term certainty in their monthly repayments while still having an avenue to refinance their loans later. MAS has received feedback from the industry indicating that customers had a generally tepid reception to previous launches of longer-term fixed-rate mortgages.

In the United States, government-backed home mortgage companies, namely, Freddie Mac and Fannie Mae, were established to provide liquidity, stability and affordability in the mortgage market. They purchase mortgages from lenders to either hold or repackage, guarantee and sell them as mortgage-backed securities in the secondary market, thus making more capital available for lenders to provide new mortgages. Singapore’s FIs have sound capital positions and stable funding. Their mortgage lending approach is not constrained by a lack of available funding and they have been able to meet customers’ needs without any support from Government-backed entities.