Curbs on long mortgages to prevent buyers from over-extending
By Rachel Chang
IN A move that took the market by surprise, the Government introduced new measures yesterday designed to cool the property market and stop home buyers from over-extending themselves.
From today, the Monetary Authority of Singapore (MAS) will restrict all home loans to a maximum of 35 years.
Home buyers who take a loan that lasts more than 30 years, or extends past their retirement age of 65, will now have to fork out significantly more in cash.
Such long loans can now only be up to 60 per cent of the property's value if this is the buyer's first mortgage. That means that he must pay 40 per cent of the price upfront, in cash.
If this is his second or more property loan, the loan limit shrinks to just 40 per cent of the property's value.
The new loan limits and rules also apply to home owners who refinance their loans.
Analysts said the moves will affect a broad swathe of property buyers and leave only young buyers under the age of 30 untouched.
In a statement last night, MAS explained that it is acting to curb upward pressure on property prices from the current low interest rates worldwide, and the rapid credit growth driven by the US' latest round of quantitative easing (QE3).
"Monetary conditions worldwide are far from normal," said MAS chairman Tharman Shanmugaratnam, who is also deputy prime minister.
But the current climate of easy credit and low rates will eventually change, he cautioned.
MAS said that this is why it is acting now to prevent prices from spiking beyond sustainable levels, so that the eventual correction "which will hurt borrowers and destabilise our financial system" can be softened, if not avoided.
The central bank also revealed the impact of easy credit on home loans over the last three years.
The average tenure for new home loans has risen from 25 to 29 years and currently, more than 45 per cent of new home loans have tenures exceeding 30 years.
In August, a 50-year home loan offered by the United Overseas Bank (UOB) drew the ire of National Development Minister Khaw Boon Wan, who described it as a "gimmick".
Long-tenure loans, said MAS, cause buyers to over-estimate their financial wherewithal.
A rising property market also gives buyers and lenders "false confidence" that the property can always be sold off for a profit if the loan becomes difficult to service.
Analysts interviewed yesterday do not expect property prices to fall drastically in reaction, but they predicted some buyers will exit the market, transaction volumes will cool and price rises will moderate.
In the third quarter of this year, both Housing Board resale prices and private property prices accelerated their climb.
The board's resale price index grew 2 per cent, outstripping the 1.3 per cent growth in the second quarter, while the private property market rose 0.5 per cent, up from 0.4 per cent in the preceding quarter.
The new changes, said observers, would land hardest on older buyers, especially those with more than one property. Young buyers should get away with just paying a shade more every month.
For example, a 40-year-old buyer can now take a loan of only 25 years if he wants to continue to be able to pay the usual 20 per cent down payment.
But if he were to take out the shorter 25-year loan of $800,000 for a $1 million property, this would now mean monthly payments of $3,051, at current interest rates of 1.1 per cent. This is $400 more than if he had a 30-year loan.
But for a buyer like investor Jack Liang, 49, who is on the hunt for his third property, the new rules mean "game over", he said.
If he finds a $1 million property that he wants, he can take only a 16-year loan, up to the retirement age of 65 years old. His monthly repayments will be $4,546, likely more than its rental yield.
Or, he can take a longer loan, but for only 40 per cent of the property's value, as it is not his only housing loan. He must then have $600,000 cash in hand to purchase the property.
"It's time to pull up the handbrake," he lamented.
