“Explore possible loan refinancing”, Tharman tells highly leveraged households

In answering a parliamentary question, Senior Minister and Minister in charge of MAS Tharman Shanmugaratnam said: “Borrowers who have difficulty servicing their mortgages should approach their lenders early to explore possible loan refinancing and repayment solutions.”

Explore possible loan refinancing
Image credit: iCompareLoan

The Senior Minister was responding to a Parliamentary question asking, “given the recent increase in interest rates, what is MAS’ assessment on the risk of borrowers defaulting on loans financed through floating rate loan packages offered by local banks.”

Mr Tharman in replying to the question said, “the household debt situation in Singapore by and large remains healthy, and should remain so in the rising interest rate environment…(but) there will be a small segment of households who are more highly leveraged and will be more seriously affected by interest rate rises (and) borrowers who have difficulty servicing their mortgages should approach their lenders early to explore possible loan refinancing and repayment solutions.”

“The household debt situation in Singapore by and large remains healthy, and should remain so in the rising interest rate environment that we face.

“The median Total Debt Servicing Ratio (TDSR), which measures the proportion of income spent on debt repayment, is 43% for new mortgages issued over the past year, well within the regulatory threshold of 55%. The proportion of non-performing mortgages in overall outstanding mortgages has also remained low and stable at less than 1%.

“The average loan-to-value ratio for outstanding mortgages extended by financial institutions is less than 50% as at Q1 2022, suggesting that households generally have significant net positive equity in their residential properties. Households’ cash deposits have also grown faster than their liabilities, which improves their ability to meet immediate debt repayment obligations.

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

“(a) The interest rate used to calculate loan repayments under the TDSR is the higher of 3.5% or the prevailing market rate. This rate has built in a buffer against interest rate rises for borrowers who have taken out a mortgage in the past.

“(b) Loan-to-value limits and restrictions on loan tenure have also encouraged greater financial prudence among mortgage borrowers.

“Looking ahead, stress tests by MAS suggest that most households, including borrowers on floating rate packages, should be able to service their debt even under conservative scenarios of significant income losses and a full pass-through of sharp global interest rate hikes.

“That said, there will be a small segment of households who are more highly leveraged and will be more seriously affected by interest rate rises. Borrowers who have difficulty servicing their mortgages should approach their lenders early to explore possible loan refinancing and repayment solutions. For financially distressed HDB homeowners, MAS has worked with MND, HDB, MOM and financial institutions to establish standardised interventions when late repayments occur.

“These include potential loan restructuring solutions, early referrals to appropriate social service agencies and in certain limited cases, helping homeowners obtain alternative HDB accommodation where foreclosures are unavoidable.

“MAS urges everyone to exercise caution in any new borrowings. Households should assume that there will be further interest rate increases over the next year at least, and be sure of their ability to service their loans before making additional commitments.”

Mr Tharman Shanmugaratnam, Senior Minister and Minister in charge of MAS

Mr Paul Ho, chief officer at iCompareLoan said: “Considering the increasing global interest rates, the rising borrowing costs for home loans is inevitable.”

SORA will rise in tandem with the internationally rising borrowing costs

Our domestic benchmark interest rate – the Singapore Overnight Rate Average (SORA) – is set to hike up in tandem with US rates. But for now, mortgage interest rates are still competitively hovering around 1.65 – 2.35 per cent, but they will continue to go on the up and up throughout 2022.

Mr Ho said, “how the FED interest rate hike works is by making loans more expensive and technically, should lead to reduced spending. The move will put pressure on Singapore’s financial institutions to raise interest rates as well. Which us why home owners should explore possible loan refinancing.”

As most home loan rates are now pegged to SORA, you will not see interest rates prematurely rising too out of step with the US Fed Funds Rate. This is because although SORA is a “backward”-looking interest rate mechanism which reacts to interest rate movements in Singapore, changes to the US Fed Funds Rate has global repercussions, so SORA is expected to react accordingly.

The biggest interest rate hike in the US will definitely dent some of the enthusiasm in the buoyant property market, and could pose a big problem for homeowners who are still servicing their mortgage loans. This is because banks and financial institutions calculate lending rates by adding a margin (which covers their costs and their profit) to a published financial index, like SORA.

If you explore possible loan refinancing and are curious about the mortgage interest rate environment, you must be wondering about how SORA works.

SORA basically uses a volume-weighted approach where the average rate of all actual transactions traded and booked in the unsecured overnight interbank SGD cash market in Singapore between 8 am and 6:15 pm. The phrase “volume-weighted” simply means that the calculations consider the actual amount being lent.

Which means that a 3M compounded SORA rate is based on a compounding period of 3 months of the historical SORA rate which is published daily on the MAS website and a 1M compounded SORA rate is based on a compounding period of 1 month of the historical SORA rate which is published daily on the MAS website.

Mr Ho said, “All these terms, 3M, 1M, fixed rate, floating rate, etc can be confusing to some home owners who want to refinance. And also there may only be a short window of opportunity open if you want to refinance your mortgage loan.”

He added, “So, anyone who is worried about the rising borrowing costs and yet wants the best home loan should speak to mortgage consultants. They can get the best rates for home owners who want to refinance their home loans by comparing across 16 banks and financial institutions. Mortgage consultants have the latest home loan info to guide home owners to make the right decision and best of all, their services are free.”

Savvy home loan borrowers will know how to navigate away from rising borrowing costs when they explore possible loan refinancing 

What does this news mean for homeowners in Singapore? Well, it marks a closing window of time to refinance our properties and get the most savings out of our monthly repayments.

During a low-interest rate climate, savvy borrowers may prefer to capitalise on low interest payments by taking a market-pegged interest rate variable package. But when these borrowers are (like now) hit by the biggest interest rate hike, they may try to change the loan to a fixed rate package for some years so as to be able to lock in lower rates and better manage their cash flow.

Fixed rate packages are usually more expensive, but provide the most stability as rates are kept fixed for up to the first 3 to 5 years of the loan tenure. There is no perpetual fixed rate being offered by banks in Singapore at the current moment. This is where a refinancing guide can be useful to home owners to read-up on remortgage and be knowledgeable about the entire process.

Positive side of interest rate environment

Today, consumers have a wide range of home loan packages to choose from compared to several years ago, and this is a huge advantage to home buyers and investors.

Home loans could also be tied up with other programmes which rewards customers with a higher interest rate on their deposits if they transact more with the bank, such as getting a home loan and crediting their salary with the same bank.

Typically, with mortgage loans you are offered attractive rates for the first three years when you refinance – following which the interest rates are adjusted upwards. This usually coincides with the end of the lock in period, offering borrowers a good opportunity to relook their loans.

Before you explore possible loan refinancing, those who already have a home loan with a lender you are comfortable with, should consider repricing, especially as we are at the juncture of the ever rising borrowing costs.

Repricing refers to switching to a new home loan package within the same bank while refinancing refers to closing your current home loan account and setting up a new home loan account with another bank.

A repricing typically occurs when new incremental loan facilities and/or refinancing facilities are introduced into the same documentation as an existing loan. The proceeds from the new incremental loan facility will have a lower margin and will be used to repay the existing loan.

While repricing lets you replace your existing loan with a new loan with the same lender that potentially has a new interest rate or revised repayment timeline, refinancing might be a good option if interest rates have dropped or are lower than your current rate, or if you need to extend your repayment term.

When considering refinancing versus repricing, remember that securing a lower interest rate will reduce your cost of borrowing so you’ll pay less on your home loan, overall.

Written by Ravi Chandran

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