BANKS may have to adopt tougher rules before granting loans for private home purchases. This is to ensure more financial prudence.
Questions may have to be asked, like what proportion of a person's monthly gross income is being used to service the home loan. The Monetary Authority (MAS) of Singapore has asked for this mortgage servicing ratio (MSR) to be capped at 30 per cent for private homes, as was done in the case of HDB flats last month.
MAS will also introduce broader rules in which the lender looks at total monthly debt payments of the borrower before granting property loans - to further strengthen the credit evaluation process.
The moves will foster greater financial prudence but further tighten credit for private home buyers, and impact the volume of property transactions, analysts say.
When contacted, MAS would not comment on whether it has any impending plan to extend a prescriptive MSR cap to private home mortgages (like the one it imposed on HDB flats as part of last month's property cooling measures). However, it confirmed advising financial institutions (FIs) that they should also consider applying the MSR to loans and refinancing facilities for private residential properties. "In addition to applying a MSR for HDB flats, MAS expects FIs to continue to be prudent in assessing the repayment ability of borrowers for all residential property loans," it added.
Talk in some circles is that MAS could roll out a more prescriptive cap on MSR for private home loans after it reviews an audit of banks' home mortgages portfolio conducted late last year.
Under the latest property cooling measures effective Jan 12, MAS has capped the MSR for home loans granted by FIs for the purchase and refinancing of HDB flats at 30 per cent of a borrower's gross monthly income. "This helps ensure more prudent lending by banks and reduce overleveraging by borrowers," MAS said yesterday in its response to BT's questions.
(For mortgages granted by HDB, the cap on the MSR has been lowered from 40 per cent to 35 per cent.)
MAS also said it will introduce broader rules on the debt servicing ratio (DSR) for property loans granted by FIs, to "further strengthen their credit evaluation process".
The DSR refers to total monthly debt repayments - including property loans, car loans, payment of credit card bills and repayment for any personal credit lines - as a percentage of a borrower's gross monthly income.
"The DSR takes on a more holistic approach than the MSR, taking into account other forms of debt repayment obligations in credit assessment. MAS is conducting a comprehensive review as FIs currently adopt varying approaches for the computation of DSR," said MAS.
Knight Frank chairman Tan Tiong Cheng said that the DSR would serve as a further check to ensure prudence on the part of banks as well as borrowers. "If this is the intention, it would be logical that banks be required to review a borrower's total outstanding debt not only when granting home mortgages but also when evaluating non-residential property loans to individuals. Otherwise, it could unintentionally cause demand for property, currently being fuelled by the low interest rate environment, to be transferred to the non-residential property sectors such as shop units, offices and industrial."
DTZ Southeast Asia chief operating officer Ong Choon Fah said that the MSR and DSR caps would affect borrowers who depend on their parents to chip in for monthly mortgage instalments, since these caps will be based on their monthly incomes.
However, this still leaves the door open for parents to help with an upfront cash payment when their children buy private residential properties, to make up for a smaller loan resulting from the MSR and DSR caps.
"The idea is to instil greater financial discipline. We cannot believe interest rates will stay low forever. If major economies such as United States and China improve, that could lead to higher interest rates. When you buy property, it is a long-term commitment; you cannot think just based on today's scenario."
Giving his take, Knight Frank's Mr Tan said the implication of the two caps is that private-home buyers will have to come up with a bigger cash down payment. "The advice from government is that when buying a property, you should buy something which, by their definition, is affordable to you, something that you can follow through in the longer term.
"If you take maximum gearing and if something untoward happens, you may not be able to service your loan. So the advice is: "Buy what you have the capacity for."
While that's good for financial prudence, "it could put a spanner in the works for someone who believes in the potential of a particular property for instance, or wants to buy it to fulfil their dream or aspirations", says Mr Tan.