Impact of Rising Interest Rate Outlook on Household Debt Situation in Singapore

Mr Desmond Choo asked the Prime Minister in view of the short-term interest rates raised by the US Federal Reserve (a) what is the impact on mortgage rates in Singapore; (b) whether there has been an increase in mortgage delinquency; and (c) what are the plans to educate younger and first-time home buyers on expected higher borrowing costs.

Sir, the household debt situation in Singapore remains healthy, although there is a need for prudence in borrowing as interest rates are expected to rise in the coming years.

The overall debt servicing ability of households has remained manageable, with the median Total Debt Servicing Ratio (TDSR) at 43% last year. This is well within the TDSR threshold of 55%, which was tightened last year as part of the Government and MAS’ property cooling measures.

Second, the credit profile of mortgages is still healthy, with the proportion of delinquent mortgages at less than 1%.

Third, household net wealth grew even through the pandemic, with household assets growing faster than household debt. Households’ liquid assets, such as cash and bank deposits, continued to exceed their total liabilities in aggregate.

Most households should still be able to service their mortgages as Singapore’s domestic interest rates pick up alongside global rates from their current lows. MAS’ stress tests suggest that the median household mortgage servicing ratio will remain manageable even under scenarios of significantly higher interest rates or lower incomes. However, there will be a small segment of households with higher leverage, who will be more constrained by interest rate rises. More broadly, all borrowers should exercise caution in their home purchases, to avoid having to cut back on other household expenditures if interest rates rise sharply.

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

The interest rate used to calculate loan repayments under TDSR is the higher of 3.5% or the prevailing market rate. This rate is about two percentage points higher than prevailing interest rates for new private property loans, which builds in a buffer for borrowers to service their mortgages across a normal interest rate cycle.

Loan-to-value limits and restrictions on loan tenure have also encouraged greater financial prudence among mortgage borrowers of different profiles. For example, loan tenure restriction limits the duration and, hence, the overall financing that older borrowers can take up, because it is likely that income sources to support mortgage repayment would be more constrained after retirement.

MAS also requires that financial institutions (FIs) provide homebuyers with the information they need to make sound and prudent decisions, before extending them residential mortgages. This includes projections on how a borrower’s monthly mortgage instalments would vary under different interest rate scenarios.

MoneySense, our national financial education programme, also alerts consumers to important financial considerations when committing to a property purchase, including the recurrent, long-term costs involved.

Mr Speaker, I would like to ask two supplementary questions. First, it is in regard to what the Minister of State mentioned just now about debt servicing being in good condition. It is good to hear that. But, Mr Speaker, may I ask what is the proportion of the segment of those exposed in the population in terms of personal, unsecured loans?

The second supplementary question is in regard to the domestic interest rate outlook. The Federal Reserve Bank of the US is expected to raise their rates quite significantly. The expectations are based on the committee's announcements. There will be sharp rate hikes over the course of the year and into 2023. Given that it would definitely affect the domestic rate situation in Singapore and it would be very fast, it would definitely affect households and businesses in terms of cash outlays, especially so in the current inflation environment that we are seeing now. Can the Minister of State share what is our domestic rate outlook? And I think he mentioned about the projections and scenarios, but what does it mean for households and businesses, in terms of the rapid pace?

Sir, I thank the Member for his questions. As the hon Member would know, the outlook for Singapore's domestic interest rates is closely tied to global rates. Accordingly, households and businesses should expect a pick-up in domestic rates and its attendant increase in financing costs.

Most Singapore-listed firms continue to hold sufficient liquidity in Q4 2021, with liquid assets, such as cash and cash equivalents, continuing to exceed their shorter-term liabilities. The debt servicing of Singapore-listed firms remains manageable, with most firms having sufficient earnings to cover their interest expenses, even in prescribed stressed scenarios of further increases in interest rates, with cash reserves providing additional buffers in this regard.

That said, the highly-leveraged companies, especially those with lower net profit margins, may find the increase in borrowing cost eroding their cashflow. This would also apply to some of the SMEs which continue to underperform due to COVID-19 restrictions. But the broader economic recovery should provide some reprieve as Singapore opens up and emerges from the pandemic.

To the Member's questions about personal unsecured lending, credit quality has remained generally favourable and stable over the past year, having improved from pre-pandemic levels. As a share of GDP, outstanding credit card balances have come down from 2.5% in Q4 2019, to 2.1% in Q4 2021. Similarly, rollover balances as a share of GDP have inched down from 1.3% in Q4 2019, to 1% in Q4 2021. The charge-off rate decreased further from 6.3% in Q4 2019, to 4.4% in Q4 2021.

In this regard, we urge consumers to be prudent with their new borrowings to reduce vulnerability to further income shocks and the higher interest rate environment.

I would also like to assure the Member that MAS has also helped consumers who need assistance with their outstanding debt. For example, consumers in financial distress can seek help from Credit Counselling Singapore for debt management assistance or by taking up commercial products such as debt consolidation plans that may alleviate their repayment burden.

Mr Speaker, would MAS consider, especially for young first-time home buyers, to be appraised, as part of due diligence on the new interest rate trajectory as part of the mortgage loan application so that they will know what is their payment plan based on the current rate and what is the expected rate, especially when we know that most of the purchases had been done in the low-interest environment for the last couple of years and it will dramatically change over the next couple of years?

I thank the Member for his question. I think it is a very important question with regard to, particularly, first-time home buyers entering the property market at this juncture where potential interest rates can rise.

First, I think it is quite important that we urge all home buyers to exercise caution in their home purchases and in making these decisions, and also in financial prudence of how much they can borrow and their own balance sheets, given potential rise in interest rates.

We also note that even as interest rates increase after an extended period when it was uncharacteristically low – we had that whole period where interest rates were just uncharacteristically low over time – household income, as I had mentioned in my original answer, is expected to continue to grow alongside the broader economic recovery as we emerge from the pandemic.

Second, the Member would be pleased to know that MoneySense educates the public on property loan issues through a property resource guide on its website and social media posts, where issues covered include the importance of buying within one's means and the features of different types of loans. MoneySense intends to push out more material on the impact of rising interest rates on financial decisions, including on property purchases.