SINGAPORE – Singaporeans have reduced their debt levels as high interest rates discouraged them from taking new loans and healthy income growth helped them pay off their obligations, the central bank said in a report released on Nov 27.

Aggregate household debt fell for the eighth consecutive quarter to 1.2 times personal disposable income in the third quarter of 2023, the lowest level in over a decade, the Monetary Authority of Singapore (MAS) said in its Financial Stability Review for this year.

MAS said that households have exercised caution in taking on additional loans due to the increase in interest rates since the second half of 2022, resulting in a decline in the amount of money they owe from a year ago.

Interest rates in Singapore, as measured by the three-month compounded Singapore Overnight Rate Average, which is used as a benchmark to price loans including mortgages, rose to more than 3.5 per cent in the second half of 2023, from less than half a per cent in the first half of 2022.

The biggest drop has been in personal loans, which represent about a quarter of the aggregate household debt.

Income growth and financial buffers – in the form of extra savings – also cushioned rising debt servicing costs for households and helped to keep non-performing loan (NPL) rates and leverage risks low.

Leverage risks are defined as the vulnerability of borrowers to an increase in debt relative to income, putting them at risk of not being able to meet their repayment obligations.

To ascertain the financial resilience of households, the central bank also carried out stress tests on how borrowers would fare in drastic economic scenarios.

Those tests showed that most borrowers refinancing into more expensive home loans would be able to handle higher monthly repayments should there be further hikes in interest rates or income losses.

Still, a small segment of highly leveraged borrowers could fail to repay their loans on time.

Hence, the central bank warned that borrowers should continue to exercise caution as interest rates are likely to remain high.

“Borrowers should remain prudent and continue to maintain sufficient liquidity buffers to withstand potential shocks,” MAS said.

Its advice comes as nominal wage gains are expected to moderate amid slower growth and global macroeconomic uncertainties in the quarters ahead.

“Borrowers should thus remain prudent and maintain their financial buffers where they can to protect against potential shocks,” it added. 

Mortgage levels moderating

Meanwhile, housing loans, which make up about three-quarters of aggregate household debt, grew at a subdued annual pace of about 1 per cent in the third quarter as some existing borrowers paid down their mortgages.

At the same time, new housing loans have also moderated in tandem with reduced transaction activity in the property market, MAS said.

The central bank said mortgage servicing has remained manageable partly because of macroprudential measures, such as the recent adjustments in total debt servicing ratio limits that ensured continued financial prudence among borrowers in their property purchases.

Existing housing loan-to-value (LTV) measures have also helped in building up significant buffers for banks and borrowers against falling property valuations. 

As at the third quarter of 2023, the average LTV ratio has remained low at 41 per cent, MAS noted.

“This reflects the limits imposed on the loan amount for property purchases, even as households continued to pay down their existing mortgage loans,” it said.

Highlighting the resilience of housing loans’ credit quality, MAS said the housing NPL ratio has stayed low at 0.2 per cent. Also, mortgage loans in arrears have been broadly stable, inching up slightly from 0.4 per cent in the second quarter of 2022 to 0.5 per cent in the third quarter of 2023.

The number of foreclosed residential units has also remained low at 27 units thus far in 2023.

Credit card risks on the rise

Even as higher income and extra savings have eased leverage risk, the central bank said maturity risk, which refers to payments due on more expensive short-term borrowing such as on credit cards, has risen.

“Households’ short-term debt, as proxied by outstanding credit card balances, increased further in 2023... underpinned by the continued recovery of resident outbound travel and domestic retail sales, alongside the resumption of large-scale entertainment events in Singapore and the region,” MAS said.

Still, outstanding credit card balances as a share of personal disposable income remain below their long-term average, it noted.

Rollover balances as a share of personal disposable income inched up from 2 per cent in the third quarter of 2022 to 2.2 per cent in the same period of 2023, alongside an increase in the number of credit card holders and growth in outstanding balances.

However, revolvers – those who have not paid off their balances in full – accounted for only about 20 per cent of all card holders, which is below the historical average.

MAS advised credit card holders to prudently assess their financial situation before committing to large purchases financed by short-term debt.

It asked borrowers who might be facing financial difficulties to approach their lenders early to explore possible loan refinancing and repayment solutions. They should also explore options such as debt consolidation plans offered by the financial industry and customised debt management plans.

Giving evidence of improved financial health, MAS said household sector net wealth rose by an annual 7.6 per cent to $2.7 trillion in the third quarter, largely supported by sustained growth in liquid assets – cash on hand or in bank deposits – and in the value of residential property assets.

Cash and deposits, comprising about 20 per cent of total assets as at the third quarter, continued to exceed total liabilities, with growth of the former outpacing that of the latter since the first quarter of 2022.

However, the personal savings rate has trended down slightly from 35.1 per cent in the third quarter of 2022 to 34.6 in the same period of 2023 on the back of higher travel and domestic retail spending, MAS said.