SINGAPORE - The Monetary Authority of Singapore (MAS) will start to restrict the tenure of loans granted by financial institutions for the purchase of residential properties from Oct 6 this year.
The maximum tenure of all new residential property loans will be capped at 35 years.
Loans exceeding 30 years' tenure will face significantly tighter loan-to-value (LTV) limits. This will apply to both private properties and HDB flats.
MAS said in a statement that this is part of the Government's broader aim of avoiding a price bubble and instilling long term stability in the property market.
Such a move will also curb continued upward pressure on residential property prices, driven by low interest rates and rapid credit growth.
According to MAS, a significant supply of housing will come onto the market over the next two years.
However, prices in both the HDB resale market and private residential property have continued to rise in the second and third quarters of this year.
Financial institutions have also been lengthening the tenures of residential property loans.
The average tenure for new residential property loans has increased from 25 to 29 years over the past three years.
More than 45 per cent of new residential property loans granted by financial institutions have tenures exceeding 30 years.
MAS said such long tenure loans pose risks to both lenders and borrowers.
"Lower initial monthly repayments, made possible by long loan tenures and the current low interest rates, may lead borrowers to over-estimate their ability to service the loans, and take a bigger loan than they can really afford.
"A rising property market may give false confidence to both borrowers and lenders that should there be difficulty in servicing the loan, they can always sell the property at a higher price," it said.
However, in reality, long tenure loans impose a larger debt repayment burden on borrowers as interest accumulates over a longer period.
When interest rates eventually rise, borrowers who have overextended themselves will have difficulties repaying their loans. If property prices fall, financial institutions may be caught holding the bad loans.