Home Owners with Private Bank Loans Affected by Rise in Interest Rates and Risk of Foreclosures

Mr Alex Yam asked the Prime Minister (a) what proportion of home owners with loans from private financial institutions have been affected by the rise in interest rates; and (b) what is the risk and magnitude of foreclosures in the near to medium term.

Mr Speaker, households with outstanding mortgages will see higher borrowing costs as market interest rates rise from the exceptionally low levels of the past decade. They will face the impact of the rise at different points of time, as the Minister for National Development articulated earlier, and it also depends on the type of loan packages that they have taken up.

As of 2Q2022, one out of three home owners with outstanding mortgages from financial institutions (FIs) are on mortgage packages that move in tandem with market interest rates. These borrowers have already seen mortgage repayments rise over the past months. The remaining borrowers are then either on rates linked to bank board rates or fixed deposit rates, which track market interest rates but with some lag; or two, on fixed interest rates for the first one, two or three years of their loans. Regardless, as rates continue or could continue to remain high beyond the next two to three years, all households will face higher borrowing costs than today and should, therefore, exercise prudence in their new borrowings.

On the whole, the household debt situation in Singapore remains generally healthy. The proportion of non-performing mortgages among FI loans is low, at 0.3%. The number of foreclosures has, in fact, trended down since 2021 and has remained low at fewer than 30 units so far this year.

MAS does not expect widespread foreclosures in the near to medium term and the situation reflects, in part, the measures we have put in place over the years to limit the amount one can borrow to buy property, including our recent further tightening of these limits.

Stress tests by MAS suggest that most households should still be able to service their mortgages under scenarios of further interest rate hikes and significant income losses. A relatively small proportion of highly leveraged households may, however, be more constrained under the stress scenarios.

I would like to thank the Minister of State for his answer. I have one supplementary question. In regard to the stress test scenario that he mentioned – he mentioned that the level of indebtedness is actually quite low. But does it incorporate the risk of a potentially 5% mortgage rate and above? The Minister for National Development mentioned just now that there will be an enhancement of workflow processes between MND and private sector FIs. So, whether that point that the Minister for National Development mentioned about the workflow processes being enhanced, can that be further enhanced? Because with the worsening of the scenario for mortgage rates, going forward in 2023, whether the enhancement of workflow processes would be of utmost importance?

I thank the Member Saktiandi Supaat for his supplementary question. We have conducted a series of stress tests and most of the stress tests by MAS suggest that, as I mentioned earlier, most of the households, including borrowers on floating rate packages, should be able to service their debt, even under very conservative scenarios of simultaneous interest rate shocks and income loss, and also a full pass-through of sharp global interest rate hikes.

These stress tests – I might qualify or caveat – only assessed debt repayment ability based on income. So, in fact, household savings, such as cash and CPF Ordinary Account (OA) funds, for example, which could provide financial buffers, are excluded. So, they are relatively conservative, in that regard.

I will share another aspect which might be useful. If you look at it from a bottom-up perspective, MAS' account level stress tests of new borrowers have assessed that most households, in fact, should be able to continue servicing their debt under stress assumptions of even a 400-basis point increase in interest rate and a 10% reduction in income.

So, we have conducted these stress tests based on quite conservative measures: excluding CPF OA, cash and also in stressing in quite higher interest rate increases.

But as the Minister for National Development had also earlier mentioned, MAS is working very closely with MND to monitor this situation carefully and, for those who are unable to service their loans, we will find ways in which to allow for debt repayment restructuring as well as to look for alternative housing.