Home Loans

New MAS Property Market Cooling Measures: What are the Effects?

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Ryan Ong

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MAS just passed new restrictions on home loans. These target over-leveraged property investors; and by happy coincidence, it helps cool the market a bit. So if you’re about to buy your first home, get a drink and toast the government. But if you’re a property investor or developer, then I advise you to, uh… send thank you letters to UOB, because it’s likely that their 50 year loan tenure “gimmick” was the cause of these new measures. That’s all I got for you bro. Anyway, here are the new cooling measures and the probable effects:

 

What are the New Restrictions?

With effect from 6th October 2012, home loans will have the following restrictions:

  • All new loan tenures are capped at 35 years
  • For loan tenures exceeding 30 years, or loan periods exceeding the retirement age of 65, first-time borrowers have a maximum LTV* of 60% (previously 80%)
  • If the borrower of such a loan already has an existing home loan, the LTV is further reduced to 40% (previously 60%)
  • For non-individual borrowers (e.g. companies), the DSR* is reduced from 50% to 40%
  • This will apply to refinancing and cash-out refinancing as well as new home loans

*LTV = Loan-to-Value Ratio. In a simplified sense: How much of the house’s value can be borrowed. So a LTV of 60% means up to 60% of the house’s value can be borrowed from the bank.

*DSR – Debt Servicing Ratio. The percentage of a borrower’s income to the borrower’s overheads.

An example of how home loans now work:

 

Young girl in chair
“It’ll be fine, she’s got a DSR of 0%. Hey, you ever think this whole lending thing will have consequences one day?

 

Home Loans Within the Age / Tenure Limits

Say I am 35 years old, and I take a home loan with a tenure of 30 years. This is my first house.

I will be (35 + 30) = 65 years old when the loan ends. My loan tenure does not exceed 30 years and does not cross my retirement age of 65. Everything is within acceptable limits.

Total amount I can borrow = 80% LTV. So if the price of the house is $1 million, the bank can loan me $800,000.

*Note: If this is my second housing loan, I can only borrow 60% ($600,000).

 

Home Loans Outside the Maximum Age Limits

Say I am 45 years old, and I take a home loan with a tenure of 30 years. This is my first house.

I will be (45+30) = 75 years old when the loan ends. My loan tenure does not exceed 30 years, but that’s irrelevant: I have crossed the acceptable age boundary (65 years of age).

Total amount I can borrow = 60% LTV. So if the price of the house is $1 million, the bank can loan me $600,000.

*Note: If this is my second housing loan, I can only borrow 40% ($400,000).

 

Home Loans Outside the Loan Tenure Limits

Say I’m an ambitious 25 years old, and I take a home loan with a tenure of 35 years. This is my first house.

I will be (25 + 35) = 60 years old when the loan ends. Okay, no problems there. But the loan tenure exceeds 30 years.

Total amount I can borrow = 60% LTV. So if the price of the house is $1 million, the bank can loan me $600,000.

Yep, breaking either the age limit OR loan tenure will reduce the maximum LTV to 60%.

 

What are the effects of these restrictions?

We foresee the following:

  • Long Term Security in the Property Market
  • Further Moderation of Property Prices
  • New Search for Alternative Investments

 

1. Long Term Security in the Property Market

 

Godzilla smashing a house
Pictured: Local banking industry

 

MAS’ main focus is on the property market as a whole. Since 2009, average loan tenures have risen from 25 to 29 years. Now, MAS is worried about a local version of the American sub-prime mortgage crisis.

As loan tenures increase, default rates go up. And if banks make it a habit of offering long loan tenures, we’ll probably see a surge in bankruptcy cases.

This is bad for the banks: If everyone defaults on their loans, the banks can’t pay the interest on their existing deposits. There’s also a spillover threat, to guarantors and mortgage insurers. Have too many defaulters, and the finance industry might come apart at the seams.

I’ll also point out our article on UOB’s 50 year loan tenure, where we specifically explain the relation between long loan tenures and being over-leveraged.

 

2. Further Moderation of Property Prices

 

People walking around HDB
Protip: Flash your MoneySmart article until the seller surrenders and sells under $50.

 

The new restrictions will dissuade some speculators and investors. With LTV ratios as low as 40%, many will lack the capital to buy new properties.

Sellers who are desperate for buyers will need to compensate; this could translate to lower median COV (cash over valuation), or bigger discounts amongst property developers.

These lowered prices will not happen overnight. Some property investors have the capital to buy even with small loan quantums. And many sellers will resist lowering their prices: Due to the currently low interest rates, property owners have got substantial holding power.

But if you’re intending to buy your first home, all of this is great news nontheless. Keep your eyes focused on existing prices, and follow us on Facebook: We’ll update you when we see the market dip.

If you’re planning to buy in a few months (a respectable decision, given these new measures), you might want to visit home loan comparison sites like MoneySmart early. Crunch some numbers; see if you’ll be ready to buy when prices drop.

 

New Search for Alternative Investments

 

Casino entry levy
Well, at least we stopped the idiots wasting their money.

 

You may have heard that new restrictions “shield” reckless investors; that it somehow saves them from their own stupidity. Umm…I’m not sure about that.

I don’t believe that, if someone wants to be an idiot with their money, you can actually stop them. If you make houses unaffordable to them, they’ll just shift their reckless investing elsewhere. Like Forex, or commodities, or high stakes Russian Roulette.

In light of the new restrictions, I foresee punters and speculators seeking new outlets. This is good news for brokerage firms, gold traders, etc., and I can see their new customers lining up already.

Image Credits:
longhorndave,Elvert Barnes, chongeileen, peachsmack, Thant Zin Myint, ashleyt

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Ryan Ong

I was a freelance writer for over a decade, and covered topics from music to super-contagious foot diseases. I took this job because I believe financial news should be accessible and fun to read. Also, because the assignments don't involve shouting teenagers and debilitating plagues.