How will higher interest rates affect local mortgages?

Steeper debt servicing costs await borrowers.

Homeowners will have to set aside a larger chunk of their paychecks to pay off their mortgages as rates rise, according the latest Financial Stability Report by the Monetary Authority of Singapore.

The MAS said that majority of housing loans offered by financial institutions in Singapore are floating-rate packages, which means that households’ monthly mortgage servicing burden will rise as interest rates normalise.

“Floating-rate packages were particularly attractive just after the GFC when interest rates globally and in Singapore were declining. Based on survey data for H1 2015, most households that took up housing loans from FIs had above-median household incomes and were financing purchases of private homes. At prevailing mortgage rates of around 2% per annum, the mortgage servicing burden would be comfortable for most households. However, this could change as mortgage rates rise,” the MAS said. 

The report simulated a scenario in which interest rates rise by 300 basis points, and found that most households should still be able to service their debts.

Mortgage repayments of households with an income of less than $7,000 per month will rise from $1,250 to $1,730 in this scenario. Those with a monthly income of $7,001 to $12,000 will see their mortgage repayments increase from $2,250 to $3,100. Lastly, those with an income higher than $12,000 will see their mortgage costs jump from $3,480 to $4,790.

“Households are generally prudent, and housing loan payments — a significant expenditure for many families — would remain manageable relative to household incomes for most households should mortgage rates rise significantly,” the MAS said.

However, highly-leveraged households will face significantly higher credit costs and might not be able to service their debts. The MAS estimates that 5-10% of households have a debt servicing ratio higher than 60% of their income.

“For these households with a mortgage servicing burden exceeding 40% at inception, a 300bps increase in mortgage rates coupled with a 10% reduction in income could push their mortgage servicing burden beyond 60%. Their total debt service burden could be even higher if they also have car loans and credit card debt,” the MAS warned.