29 July 2013

The Editor
TODAY Voices

Dear Editor

Mr Lim Soon Heng asks “Isn’t car debt more risky than property debt?”, (TODAY Voices, 25 July 2013). MAS does not think so.

First, property loans are much larger; they make up more than 70% of household debt.  Second, property loans are subject to the risk posed by an increase in interest rates. A majority of the property loans taken in recent years is on floating rate packages, unlike car loans which are on fixed rates.  When interest rates rise, so will the monthly repayments for property loans.  The ability to service the loan may be compromised.  The fact that the loan is collateralised by the property offers some comfort, but the strength of this collateral is subject to economic conditions.  Should property values decline sharply, many borrowers could end up with negative equity, as has happened in the past. This is why MAS took a series of measures, from lowering loan-to-value ratios and requiring higher minimum cash down payments, to imposing caps on loan tenures and most recently, introducing a total debt servicing ratio.

This is not to suggest that MAS does not recognise the risks posed by car loans. It is imprudent for consumers to borrow at close to 100% of the value of a car, with little or no down payment, for what is essentially a depreciating asset.  The current period of low interest rates also makes it easier for buyers to over-extend themselves and purchase a more expensive car compared to during a period of higher interest rates. MAS therefore imposed financing restrictions limiting the amount that can be borrowed against the value of the vehicle, which includes the cost of the Certificate of Entitlement, and capping the loan tenure to five years. Mr Lim will appreciate that the permitted loan-to-value ratio and loan tenure for car loans is tighter than for most property loans.

In short, MAS is concerned about the rising levels of all forms of debt that households have committed to.

Angelina Fernandez
Director (Communications)
Monetary Authority of Singapore