How Loan Tenure Affect Residential Property Prices In Singapore?
Aiming to curb continued upward pressure on residential property prices in Singapore.
With effect from 6 October 2012, Monetary Authority of Singapore (MAS) restricts the loan tenure granted by financial institutions for the purchase of residential properties in Singapore. This measure will apply to both private properties and HDB flats.
- The loan tenure capped at 35 years. This ruling will apply to loans to both individual and non-individual borrowers, as well as refinancing loans.
- Loans exceeding 30 years loan tenure, or the loan period extends beyond the retirement age of 65 years, will face tighter loan-to-value (LTV) limits.
|Housing Loan||1st Home Loan||2nd Home Loan||3rd Home Loan|
|Loan Tenure||Up To 30 Years||31-35 Years||Up To 30 Years||31-35 Years||Up To 30 Years||31-35 Years|
|Sum of Tenure & Age of Borrower||Up To 65||Above 65||Up To 65||Above 65||Up To 65||Above 65|
|LTV Limit |
Why is there a need to restricts Loan Tenure?
- Borrowers with longer loan tenure will end up paying more as interest compounds and accumulates over a more extended period. Therefore, it will cause a more substantial debt repayment burden on borrowers.
- The current climate of low interest rates may mislead the borrowers. They may overestimate their ability and taking a bigger loan which beyond what they can afford.
- When the correction comes, the interest rates rise, borrowers who have overcommitted themselves will have financial difficulties servicing their loans.
All these pose risks to financial institutions. The consequences could be, financial institutions may be caught holding more bad loans.
Government is taking this step to encourage more prudent lending and aiming to avoid a property price bubble. Also, to foster long term stability in the residential property market in Singapore.
Loan tenure is determined by Income Weighted Average Age of Borrowers (all borrowers must be mortgagors)
Following is a simple illustration for your easy reference:
|Younger Borrower Earns Higher Income||Older Borrower Earns Higher Income|
|Borrowers' Age & Income||A age 30 earns $7000 per month|
B age 50 earns $3000 per month
|A age 30 earns $3000 per month|
B age 50 earns $7000 per month
|Income Weighted Average Age|
|= (30 x $7000) + (50 x $3000) / $7k + $3k|
= ($210,000 + $150,000) / $10,000
= 36 years
|= (30 x $3000) + (50 x $7000) / $3k + $7k|
= ($90,000 + $350,000) / $10,000
= 44 years
|Maximum Loan Tenure|
for 75% Loan-To-Value
|= 65 years - 36 years|
= 29 years
|= 65 years - 44 years|
= 21 years
Longer Max Loan Tenure
Shorter Max Loan Tenure