The objectives of the Total Debt Servicing Ratio (TDSR) framework seem to have been met.
According to the Monetary Authority of Singapore (MAS), less than 10 per cent of existing borrowers have a TDSR of above 60 per cent, and this is expected to decline over time as households pay down their loans.
There are even more reassuring signs among new borrowers.
A spokesman tells BT: "The incidence of highly leveraged borrowers has come down for new housing loans. Almost all new housing loans are below the 60 per cent TDSR threshold, with a significant proportion of new borrowers having TDSRs of less than 40 per cent."
Borrowers are also taking fewer mortgages. As at Q3 2015, borrowers with more than one loan made up 20 per cent of all new housing loans, down from 30 per cent in 2011.
In its recent Financial Stability Review, MAS also encouraged households to pre-pay their housing loans to avert higher interest costs and monthly repayments.
Banks here see households taking steps to improve the risk profile of their housing loans by paring down their mortgages.
Tok Geok Peng, executive director of secured lending at DBS Bank, observes that the cooling measures have helped home owners downsize their home loan commitment through capital repayment, debt consolidation and other means.
Sherry Leong, head of secured finance solutions at Citibank Singapore, says: "We do not foresee any impact to (borrowers) with respect to the transition period, which should be sufficient for them to make any changes to their refinancing arrangement if required."
MAS has said that the three-year grace period is precisely for the purpose of encouraging those who have taken on high leverage on their investment properties to "right-size their loans as early as possible".
The whole point of TDSR, it has said, is to encourage more financial prudence and help to strengthen household balance sheets by tempering the growth of household debt and improving the risk profile of new housing loans.
The central bank had introduced a concession in February 2014 to broaden the exemption of TDSR to home owners who breach the 60-per-cent limit but wish to refinance the loan on the property that they live in.
As for investment homes, MAS only allows a grace period until June 30, 2017, for refinancing if the borrower agrees to pay down a portion of his or her loan (typically at least 3 per cent of the outstanding loan).
The rationale is that for investment properties, one can easily sell them away when refinancing becomes a problem, but the same cannot be said of owner-occupied homes.
But if owners of investment properties can agree to pare their debt, banks usually allow them to refinance.
Lee Liat Yeang, Rodyk & Davidson partner in real estate practice, says that in fact, the debt reduction plan works very well for borrowers who have the real ability to pay off their loans.
"It will work for people who can pass the traditional credit tests of banks but fail the present TDSR test standard by a whisker," he says.
This article was first published on February 1 2016.
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