Saturday, March 2, 2013

MAS structures in place to prevent over-borrowing

Property Guru – Wed, Feb 27, 2013 4:59 PM SGT

To ensure that home buyers do not overstretch themselves financially when taking out a home loan, banks are required to scrutinise the prospective borrowers' ability to repay the loan, noted Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam.

Mr Shanmugaratnam, who is also in charge of the Monetary Authority of Singapore (MAS), said lenders are expected to make their assessment based on the projected average interest rate over the life of the loan rather than market rates at the beginning of the loan, or "teaser" rates that may be offered for the first few years of the loan.

He said this in response to a parliamentary question by MP Foo Mee Har of West Coast GRC as to whether MAS will consider specifying a standard medium-term interest rate to be used by all Singapore banks to determine the mortgage servicing ratio (MSR) for housing loans.

He explained that MAS has introduced broad parameters that serve as the basis for calculating the medium-term interest rate. For example, it should take into account historical interest rate trends for at least ten years, as well as projections under different scenarios including stressed conditions or economic downturns.

"Within these parameters, banks have to determine their own specific medium-term rates based on their risk tolerance and credit underwriting standards. At present, the medium term interest rate for housing loans ranges between three percent and four percent."

He added: "MAS has capped the MSR for housing loans granted by FIs (financial institutions) for the purchase of HDB flats at 30 percent of a borrower's gross monthly income. For these loans, MAS requires FIs to base their calculations of the monthly interest payable on the medium-term interest rate for the purpose of determining the monthly instalment."

The Minister noted that the MSR limit lowers default risk, enabling banks to better assess a borrower's repayment ability and ensures that home buyers do not over-borrow.

Romesh Navaratnarajah, Senior Editor of PropertyGuru, wrote this story.

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Singapore cooling: Mortgage loans could drop up to 20%

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