Saturday, March 30, 2013

Mortgage rates on the way up


The Straits Times  |  Posted: 29 March 2013
Home buyers will have to stump up more of their income for loan payment

Mortgage rates here are on the rise and could continue climbing as funds grow tighter.

Many banks have them pegged to a key banking industry rate also known as the Singapore interbank offered rate (Sibor), the rate at which banks lend to each other.

Last year, that rate was Sibor plus 0.8 to 0.9 per cent but it rose to Sibor plus 1.15 per cent earlier this month, a Barclays report this month noted.

The Sibor has been hovering around 0.37 per cent to 0.38 per cent in recent weeks.

This hike could be partly due to Singapore's current very high level of credit as measured by the loan-to-deposit ratio, which at 97 per cent is at its highest level since 1999, Barclays analyst Sharnie Wong noted in the report.

This tightening has led to competition for deposits in recent months and some banks have already hiked mortgage rates by 25 to 35 basis points, she noted.

"If average funding costs for the banks rise further, we believe Singapore mortgages will be repriced higher, similar to the trend in Hong Kong back in 2011 and early 2012 when a liquidity squeeze caused banks to raise mortgage rates from as low as 0.9 per cent to 2.1 per cent currently," added Ms Wong.

Barclays analyst Tricia Song noted in a separate report that the spread in Sibor-plus home loan packages has risen further since the January cooling measures.

For instance, first to third year rates offered by DBS Bank for uncompleted properties rose five basis points from Sibor plus 0.85 per cent to Sibor plus 0.9 per cent after the curbs.
The margin after the third year is maintained at 1.25 per cent, the report noted.

Mr Timothy Kua, director of SmartLoans.sg, said he has also observed a 0.2 per cent to 0.3 per cent hike in rates in general across banks over the past three months.

"We believe that banks might be increasing rates on current home buyers to counter the overall drop in sales volume due to the cooling measures," he added.

"There is still a pool of first- time buyers in the market not affected by the cooling measures and banks might be trying to capitalise on that."

This increase means that home buyers will have to stump up more of their income.
                                                                                                                                         
For instance, assuming an 80 per cent loan-to-value ratio and a 30-year tenure, a borrower will take a $800,000 loan on a $1 million home.

Should interest rates rise from 1.5 per cent to 1.8 per cent, the buyer will have to fork out a monthly payment of $2,878 from $2,761 previously. In all, he would have also paid close to $42,000 more in interest.

Ms Wong also cited the possibility of the Monetary Authority of Singapore (MAS) introducing a risk weighting floor - regulating the amount of capital that must be held against residential mortgage books - that could limit housing credit and rising property prices.

This will ensure banks have buffers that can withstand sudden adjustments in asset prices.
While the MAS does not currently regulate mortgage risk weighting, this is a potential tool for it to use in the future to limit mortgage credit to cool housing prices, she said.

Hong Kong already did so last month with a 15 per cent floor to risk weight on new mortgages as part of its sixth round of cooling measures.



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