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Date [ 2014-01-23, 09:38 ]

Steps are being taken to brake the increase in household and other debts.

Putting a brake on housing loans.

(Kuala Lumpur=Koreanpress) by Ramani Rathir = The Estimates Committee, appointed by the Singapore Government, while considering the Budget for the Financial Year (FY) 2013/2014 also enquired into certain matters, including measures to control rising household debt, assistance schemes to cope with rising cost of living, measures for small and medium enterprises (SMEs) to cope with rising business costs and improve productivity and the effectiveness of financial education and literacy programmes.

MEASURES TO CONTROL RISING HOUSEHOLD DEBT

The Committee expressed concern with rising household debt and was averse to the rise in the number of pawnbrokers and licensed moneylender outlets in recent years.

It felt that the easy accessibility to pawnbrokers and licensed moneylenders in the city-state made it easier for the public to take up unsecured loans and over-commit themselves financially. There was also a strong perception that many households might have over-invested in properties due to lower interest rates.

In this regard, questions were raised as to whether household debt as a proportion of income had changed over the last decade and, if so, what were the driving forces behind this change.

The Monetary Authority of Singapore (MAS) reported that the household debt-to-income ratio fell in the second half of the last decade but had been rising slightly since 2009 as the strong growth in investments in the property market had caused the increase in household debt to outpace rise in household income.

Despite this, the household debt-to-income ratio, estimated at 2.1 times in 2012, was lower than the peak of 2.6 times in the mid-2000s. Household balance sheets, at the aggregate level, remained healthy as cash and deposits owned by households exceeded household debt.

MAS explained that some households might be over-extended due to abnormally low interest rates and stretched loan tenures. Such households might face difficulties if interest rates rose significantly in the coming years.

While there was no precise measure of borrowers that were highly-leveraged, a rough guide could be to look at the total debt servicing burden, or the proportion of monthly income used for loan repayments. By this measure, an estimated 5% to 10% of borrowers had monthly debt servicing burdens greater than 60% of their incomes. If mortgage rates were to rise, such borrowers would face pressures on their incomes.

To control household debt MAS had introduced several measures to encourage financial prudence and reduce the incidence of highly-leveraged borrowers in housing loans. These included:

a Loan-to-Value (LTV) limit: For individual borrowers with no outstanding housing loan, the LTV limit was set at 80% (lowered to 60% if the loan tenure exceeded 30 years or the loan period extended beyond the borrower’s retirement age of 65).

For individual borrowers obtaining a second housing loan, the LTV limit was set at 50% (lowered to 30% if the loan tenure exceeded 30 years or the loan period extended beyond the borrower’s retirement age of 65).

For individual borrowers obtaining a third or subsequent housing loan, the LTV limit was set at 40% (lowered to 20% if the loan tenure exceeded 30 years or the loan period extended beyond the borrower’s retirement age of 65).

For non-individual borrowers, the LTV limit was set at 20%.

With regards to minimum cash downpayments, for  individual borrowers with no outstanding housing loan, it was 5% of the valuation limit, defined as the lower of the current property value or purchase price (10% if the loan tenure exceeded 30 years or if the loan period extended beyond the borrower’s retirement age of 65).

Individual borrowers with one or more outstanding housing loans and who were seeking to obtain a second or subsequent housing loan would be subjected to a minimum cash downpayment of 25% of the valuation limit.

There were restrictions on loan tenures too. This had the maximum loan tenure of all new residential property loans granted by financial institutions capped at 35 years. In addition, loans which exceeded a  30-year tenure or extended beyond the borrower’s retirement age of 65 would face significantly tighter LTV limits.

Then there was the Total Debt Servicing Ratio (TDSR). The framework required financial institutions to standardise the computation methodology of the TDSR or the percentage of total monthly debt obligations to gross monthly income.

The coverage of the TDSR framework was designed to be comprehensive and was applied to loans for the purchase of all types of property, loans secured by property and the re-financing of all such loans.

The TDSR threshold was set at 60%. Any property loan extended by the financial institutions in excess of a 60% TDSR would be subject to tighter underwriting controls and monitoring.

Apart from housing loans, MAS reported that it had reintroduced LTV limits and tenure curbs for car loans as persistently low interest rates had made it easier for buyers to buy more expensive cars and increased their risk of over-extending their finances. In addition, new rules on unsecured credit and credit cards had been introduced to help individuals with credit problems avoid further debt.

MAS has set the TDSR threshold at 60% for a start to allow both the financial institutions and borrowers to familiarise themselves with the TDSR framework and its computation methodology. The authority will monitor and review the 60% threshold over time to ensure it met the objective of encouraging financial prudence.

It has calculated the TDSR, based on all loans, including property, car and credit card debts. The calculation used gross income as it was the most up-to-date income information that could be easily verified.

Thus far, the TDSR framework, together with earlier rounds of property cooling measures, had helped to temper momentum in the property market. Private residential property prices had continued to moderate and overall transaction activity had declined following the implementation of the framework. The amount of new housing loans had also contracted.

Currently, MAS has estimated that about one-fifth of borrowers had a monthly debt servicing ratio of between 40% and 60%.

MAS also estimated that about 5% to 10% of borrowers with outstanding property-related loans had a monthly debt servicing ratio which exceeded 60% of their monthly income. This calculation included all borrowings, including property, car, credit card and other debt obligations. This has made them highly-leveraged borrowers.

It reported these estimates were based on residential property loans granted by financial institutions, the bulk of which was for purchases of private residential property. A large majority of these borrowers had above-median incomes and were servicing only one housing loan.

As it stands, only time will tell if these measures of control will curb the rising household debts. abc@koreanpress.net

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