Setting Total Debt Servicing Ratio Medium-term Interest Rate Floor at 4% Per Annum

Mr Chua Kheng Wee Louis asked the Prime Minister (a) what is the basis for setting the new total debt servicing ratio medium-term interest rate floor at 4% per annum; (b) how does the rate compare with historical mortgage rates in Singapore; and (c) whether MAS expects the "thereafter interest rate" to exceed the 4% per annum floor in the next 12 months.

MAS recently raised the medium-term interest rate floor to 4% for residential property loans under both the total debt servicing ratio (TDSR) and mortgage servicing ratio (MSR) frameworks, based on assessments of the likely path forward for market interest rates.

The three-month Compounded Singapore Overnight Rate Average (SORA), which is a key reference for floating rate mortgage loan packages, has increased from near-zero levels in the last decade to about 2% as of early-October 2022. Interest rates for SORA-based mortgages, which include a spread, have increased, in tandem, to about 3%. The long-run historical average for mortgage rates was around 4% in the 1990s and 2000s, before the period of exceptionally low rates we saw between 2009 and 2021.

Judging from market-based forward prices, the interest rates for SORA-based mortgages could rise further in 2023, before easing to levels that will still be significantly higher than the low rates seen in the last decade.

The medium-term interest rate floor framework ensures that borrowers continue to borrow prudently as interest rates rise.

In periods of low mortgage rates, financial institutions are required to assess borrowers' debt servicing ability at the higher medium-term interest floor rate.

In periods when the medium-term interest rate floor is exceeded, financial institutions are required to compute the TDSR and MSR using the highest interest rate applicable over the property loan tenure.

With global growth weakening and interest rates rising, we urge households to exercise caution and ensure that they are able to service their debts before making long-term financial commitments.