Update on MAS Restriction on Loan Tenure

New MAS Property Market Cooling Measures: What Effects?

Singapore, 5 October 2012…The Monetary Authority of Singapore (MAS) will restrict the tenure of loans granted by financial institutions for the purchase of residential properties. MAS’ move is part of the Government’s broader aim of avoiding a price bubble and fostering long term stability in the property market.

The maximum tenure of all new residential property loans will be capped at 35 years.  In addition, loans exceeding 30 years tenure will face significantly tighter loan-to-value (LTV) limits. This will apply to both private properties and HDB flats.

The new rules aim to curb continued upward pressure on residential property prices, driven by low interest rates and rapid credit growth.

As a result, I’ve been picking up calls from many of my clients and especially, addressing the concerns of my recent Kovan Regency‘s buyers who had successfully secured their choice unit at the recent, 29 Sept 2012’s Preview, “so what does it mean for me? Am I affected and will I be able to get the loan for my property purchase?”

MAS Restriction on Loan Tenure Effective Date

First thing first. The new rules will take effect from 6 October 2012, i.e. it is the date of the signing of the loan agreement with the bank. The date of signing the Option-to-Purchase (OTP) / Sale & Purchase (S&P) agreement does not matter as much (as there are too many various scenarios, e.g. having an in-principle approval before 6-Oct but signing the OTP on the 8-Oct, etc).

Summary of New Restrictions on Loan Tenure & Loan Limits

Home Loans Within Age / Tenure Limits

For example, if you’re a buyer that is 35 years old, and you take a home loan with a tenure of 30 years. This is your first house.

You will be (35 + 30) = 65 years old when the loan ends. Your loan tenure does not exceed 30 years and does not cross your retirement age of 65. Everything is within acceptable limits.

Total amount you can borrow = 80% LTV (highlighted by red box in the Summary Chart above). So if the price of the house is $1 million, the bank can loan me $800,000.

*Note: If this is my second housing loan, I can only borrow 60% ($600,000).

Home Loans Outside the Maximum Age Limits

Another example, Buyer B is 45 years old, and he takes a home loan with a tenure of 30 years. This is his first house.

He will be (45+30) = 75 years old when the loan ends. His loan tenure does not exceed 30 years, but that’s irrelevant as he had crossed the acceptable age boundary (65 years of age).

Total amount he can borrow = 60% LTV. So if the price of the house is $1 million, the bank can loan him $600,000.

*Note: If this is my second housing loan, I can only borrow 40% ($400,000).

Home Loans Outside the Loan Tenure Limits

Final example to illustrate the category of buyer that you’ll fall into. Buyer C is an ambitious 25 years old, and she took a home loan with a tenure of 35 years. This is her first house.

She will be (25 + 35) = 60 years old when the loan ends. Okay, no problems there. But the loan tenure exceeds 30 years.

Total amount Buyer C can borrow = 60% LTV. So if the price of the house is $1 million, the bank can loan her is $600,000.

Referring to the Summary Chart above, yes, breaking either the age limit OR loan tenure will reduce the maximum LTV to 60%.

Effects of these Restrictions on the Property Market

1) Long term stability in Singapore Property Market

MAS’ main focus is on the property market as a whole. Since 2009, average loan tenures have risen from 25 to 29 years. Now, MAS is worried about a local version of the American sub-prime mortgage crisis.

As loan tenures increase, default rates go up. And if banks make it a habit of offering long loan tenures, we’ll probably see a surge in bankruptcy cases.

This is bad for the banks: If everyone defaults on their loans, the banks can’t pay the interest on their existing deposits. There’s also a spillover threat, to guarantors and mortgage insurers. Have too many defaulters, and the finance industry might come apart at the seams.

“QE3 and low interest rates have made credit easy but this will eventually change. We will do what it takes to cool the market and avoid a bubble that will eventually hurt borrowers and destabilise our financial system,”

said MAS chairman and deputy prime minister and finance minister Tharman Shanmugaratnam.

Currently, financial institutions have been lengthening the tenures of residential property loans. Over the last three years, the average tenure for new residential property loans has increased from 25 to 29 years. More than 45% of new residential property loans granted by financial institutions have tenures exceeding 30 years.

Previously before this round of property cooling measures, UOB was the local bank that was giving out up to 50 years loan tenure. In an environment of low interest rates and continued property price increases, buyers are attracted by the low monthly repayment amounts. But herein lies the risk of being over-leveraged when interest rates starts to climb, foreigners starts to leave Singapore due to poor economic outlook and property prices fall as the market is going through the down cycle. This group of buyers are the target group that will think twice before buying their next property now.

2) Futher Moderation of Property Prices

The new MAS restrictions will dissuade some speculators and investors. With LTV ratios as low as 40%, many will lack the capital to buy new properties.

Sellers who are desperate for buyers will need to compensate; this could translate to lower median COV (cash over valuation), or bigger discounts amongst property developers.

These lowered prices will not happen overnight. Some property investors have the capital to buy even with small loan quantums. And many sellers will resist lowering their prices: Due to the currently low interest rates, property owners have got substantial holding power.

But if you’re intending to buy your first home, all of this is great news nontheless. Keep your eyes focused on existing prices, and follow us on Facebook or continue to check back our SGRealist web portal: We’ll update you when we see the market dip.

If you’re planning to buy in a few months (a respectable decision, given these new measures), you might want to visit home loan comparison sites like SmartLoans.sg early. Crunch some numbers; see if you’ll be ready to buy when prices drop.