Support such as flexible loan policies needed for S'poreans to manage higher interest rates: MP Saktiandi

Home loan rates here hit 3.85 per cent on Tuesday, a level not seen in many years. ST PHOTO: ALPHONSUS CHERN

SINGAPORE - More targeted help can be given to Singaporeans to help them navigate higher borrowing costs, said MP Saktiandi Supaat (Bishan-Toa Payoh GRC) during a Motion for the Adjournment in Parliament on Tuesday.

This comes at a time when interest rates are likely to continue rising, with the United States Federal Reserve having increased its benchmark policy rate by 3 percentage points to a range of 3 per cent to 3.25 per cent this year so far.

Interest rates in the US were close to 0 per cent for most of 2009 to 2021.

In Singapore, interest rates are largely determined by global ones. Home loan rates here on Tuesday hit 3.85 per cent, a level not seen in many years.

To ensure borrowers avoid future difficulties in servicing their loans, Singapore in September raised the rate used to compute the total debt servicing ratio (TDSR) by 0.5 percentage point for property loans granted by private financial institutions.

The TDSR is the portion of a borrower's gross monthly income that goes towards repaying all monthly debt obligations.

In other words, the authorities are now using stricter criteria to assess borrowers' ability to repay and therefore qualify for a loan.

Mr Saktiandi asked if the Monetary Authority of Singapore (MAS) will further raise the rate used to calculate loan repayments under the TDSR, given that global interest rates are set to rise further.

"I ask these questions because, in part, housing loans are over a long tenure, with significant overhang and forward risk exposure if the interest rates go up... If there is a wave of defaults or repossessions, there is always the risk of market instability, with cascading social implications," he said.

Mr Saktiandi also suggested that Singapore make its policies more flexible to support households that are more leveraged and vulnerable.

For example, borrowers currently cannot finance their homes with an HDB loan once they choose to take up a bank loan, or if they refinance their HDB loan with a bank loan.

However, home loan rates offered by local banks have risen to a level that is now less attractive than the fixed interest rate of 2.6 per cent on HDB loans.

Mr Saktiandi, who is Maybank's regional head of foreign exchange research and strategy, said: "With the present global interest rate hikes set to continue, (borrowers) will now be locked into a higher rate than the HDB rate.

"Perhaps the HDB can consider allowing eligible households to make a one-time transfer back to HDB loans." 

The HDB loan rate is pegged at 0.1 percentage point above the prevailing Central Provident Fund Ordinary Account interest rate, which is reviewed every three months.

HDB and CPF have recently confirmed that the applicable rates will remain unchanged until the end of this year.

Mr Saktiandi added that it would be helpful if the Government or HDB could provide guidance to HDB borrowers on potential rate changes further in advance.

"This will allow new and existing home owners to make a more certain choice on how they finance their home," said Mr Saktiandi.

He also asked if MAS would consider implementing temporary measures such as rate ceilings to ensure that rates do not spiral out of control and become unaffordable.

In response, Senior Minister of State for Finance Chee Hong Tat said that Singapore's household debt situation remains healthy, with the latest measures helping to ensure that property buyers continue to borrow prudently.

"We will continue to monitor the property market and review our polices where necessary in a rising interest rate environment. We will also work with financial and non-financial institutions to better help borrowers understand their loan commitments," he added.

Mr Saktiandi said that besides housing, many Singaporeans also borrow to fund their education needs.

"As commercial interest rates increase and study loans become less affordable, perhaps we could... (raise) the $2,700 gross monthly per capita income cap for the Ministry of Education's Study Loan, and extend the CPF Education Loan Scheme to cover more courses, including part-time accredited diploma or degree courses," he added.

More can also be done to fill the information gap on higher interest rates, said Mr Saktiandi, adding that notices from banks about higher loan rates are often brief and do not contain many details beyond the new rate.

"That may not be helpful to less financially savvy Singaporeans, who might not realise how they might be impacted by that increase, including how much more income or savings they would need to service the loan subsequently.

A simple solution is for lenders to model the rough impact of an interest rate rise on a particular borrower, he added. For example, financial institutions can pre-empt when home buyers might encounter issues servicing higher home loans if their incomes and savings become insufficient.

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Mr Chee replied that MAS requires financial institutions to explain how a borrower's monthly mortgage instalments would vary if interest rates increase.

He added that non-bank financial institutions, such as licensed moneylenders, are required to explain to the borrower the terms of the loan contract.

These include the breakdown of each repayment that goes into servicing the principal amount and other costs. It should also be done in a language that the borrower understands.

"Licensed moneylenders are only permitted to impose fixed borrowing costs and fixed interest rates, ensuring that borrowers would not be caught off-guard by rising interest rates," Mr Chee added.

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