To ask the Prime Minister if MAS will consider specifying a standard medium-term interest rate to be used by all banks in Singapore to determine the mortgage servicing ratio for housing loans.
Answer by Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister in charge of MAS:
1 In the current low interest rate environment, borrowers may overextend themselves when taking a loan to finance their property purchase. MAS expects banks to assess prospective borrowers’ ability to service their housing loans based on what is likely to be the average interest rate over the course of the loan rather than the market rates prevailing at the start of the loan, or the “teaser” rates that banks may offer for the first few years of the loan. MAS has set broad parameters upon which this medium-term interest rate should be based1. Within these parameters, banks have to determine their own specific medium-term rates based on their risk tolerance and credit underwriting standards. At present, the medium term interest rate used by banks to determine debt servicing capability when granting housing loans ranges between 3% and 4%.
2 In addition, MAS has capped the mortgage servicing ratio (MSR) for housing loans granted by FIs for the purchase of HDB flats at 30% of a borrower’s gross monthly income. For these loans, MAS requires FIs to base their calculations of the monthly interest payable on the medium-term interest rate for the purpose of determining the monthly repayment installment. This enables FIs to better assess a borrower’s repayment ability, and mitigate the risk of potential deterioration in loan quality, when interest rates rise from the current low levels. It further ensures that individuals do not over-borrow given the current low interest rate environment.
3 MAS also conducts regular stress testing on banks to assess their resilience to a sharp reversal in interest rate trends. In addition, MAS requires all FIs to provide potential borrowers with a Residential Property Loans Fact Sheet, which includes, among others, information on how monthly repayments will vary under different interest rate scenarios.
1 The medium-term interest rate used should take into account historical interest rates trends over an observation period of at least ten years and a forward-looking assessment of such trends (including projections of interest rates under stressed conditions, where appropriate).