Asiaone: MAS to restrict loan tenure for residential properties

MAS to restrict loan tenure for residential properties

The maximum tenure of all new residential property loans will be capped at 35 years from Oct 6 onwards. -AsiaOne

Fri, Oct 05, 2012
AsiaOne 
 
SINGAPORE - The Monetary Authority of Singapore (MAS) will start to restrict the tenure of loans granted by financial institutions for the purchase of residential properties from Oct 6 this year.
The maximum tenure of all new residential property loans will be capped at 35 years.

Loans exceeding 30 years' tenure will face significantly tighter loan-to-value (LTV) limits. This will apply to both private properties and HDB flats.

MAS said in a statement that this is part of the Government's broader aim of avoiding a price bubble and instilling long term stability in the property market.

Such a move will also curb continued upward pressure on residential property prices, driven by low interest rates and rapid credit growth.

According to MAS, a significant supply of housing will come onto the market over the next two years.
However, prices in both the HDB resale market and private residential property have continued to rise in the second and third quarters of this year.

Financial institutions have also been lengthening the tenures of residential property loans.
The average tenure for new residential property loans has increased from 25 to 29 years over the past three years.

More than 45 per cent of new residential property loans granted by financial institutions have tenures exceeding 30 years.

MAS said such long tenure loans pose risks to both lenders and borrowers.

"Lower initial monthly repayments, made possible by long loan tenures and the current low interest rates, may lead borrowers to over-estimate their ability to service the loans, and take a bigger loan than they can really afford.

"A rising property market may give false confidence to both borrowers and lenders that should there be difficulty in servicing the loan, they can always sell the property at a higher price," it said.
However, in reality, long tenure loans impose a larger debt repayment burden on borrowers as interest accumulates over a longer period.

When interest rates eventually rise, borrowers who have overextended themselves will have difficulties repaying their loans. If property prices fall, financial institutions may be caught holding the bad loans.
MAS chairman Mr Tharman Shanmugaratnam said the central bank is taking this step to require more prudent lending, and will continue to watch the property market carefully.
"We will do what it takes to cool the market, and avoid a bubble that will eventually hurt borrowers and destabilise our financial system," he said.

The new MAS rules impose an absolute limit of 35 years on the tenure of all loans for residential property. This will apply to loans to both individual and non-individual borrowers, as well as refinancing loans

In addition, MAS will lower the LTV ratio for new residential property loans to borrowers who are individuals, if the tenure exceeds 30 years or if the loan period extends beyond the retirement age of 65 years.

For these loans, the LTV limit will be 40 per cent for a borrower with one or more outstanding residential property loans, 60 per cent for a borrower with no outstanding residential property loan.
MAS will also lower the LTV ratio for residential property loans to non-individual borrowers from 50 per cent to 40 per cent.