Risk Assessment of Borrowers Defaulting on Floating Rate Loan Packages
Prime Minister's OfficeSpeakers
Summary
This question concerns Ms Ng Ling Ling’s inquiry regarding the risk of borrowers defaulting on floating rate loan packages amidst rising interest rates. Senior Minister Tharman Shanmugaratnam responded that household debt remains healthy, noting a 43% median Total Debt Servicing Ratio and non-performing mortgage rates below 1%. He highlighted MAS’s prudential measures, including a 3.5% interest rate buffer for loan calculations and loan-to-value limits, which have ensured financial resilience against global rate hikes. While stress tests show most households can manage debt, a small, highly leveraged segment is encouraged to seek early assistance or loan restructuring solutions. MAS urges caution regarding new borrowings, advising households to prepare for further interest rate increases over the next year.
Transcript
3 Ms Ng Ling Ling asked the Prime Minister 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 Shanmugaratnam (for the Prime Minister): 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 the Monetary Authority of Singapore (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.