Impact of home loans on banks likely limited

Impact of home loans on banks likely limited

SINGAPORE - Bank analysts on Monday said banks here are likely to be somewhat cushioned against the impact of the latest move by the Monetary Authority of Singapore (MAS) to tighten home loans.

The MAS on Friday said it will impose a standardised total debt servicing ratio (TDSR) framework for banks to assess home buyers' ability to borrow.

A buyer's TDSR - broadly, the level of debt as a proportion of assets - should not be higher than 60 per cent. Banks also have to use a medium-term interest rate of 3.5 per cent for housing loans.

The MAS said the move was to strengthen banks' credit underwriting practices and encourage financial prudence among borrowers.

Analysts said on Monday that the debt servicing ratios of banks here are generally likely to be lower than the 60 per cent level.

"Based on our channel checks, the TDSR of the domestic banks currently averages a comfortable 40 per cent to 50 per cent while the interest rate assumed is just above 3 per cent," said analysts from Maybank Kim Eng in a note on Monday.

"It is unclear whether other computation matrixes are as stringent as that prescribed by the MAS but the lower average TDSR against the cap of 60 per cent provides some buffer. As such, we do not think that there will be a significant impact to mortgage approvals at this stage."

CIMB analysts also wrote in a note on Sunday that they believed the new mortgage restrictions were unlikely to trigger a housing collapse.

They said that banks here have generally kept to a mortgage servicing ratio (MSR) limit of 30 per cent to 40 per cent and the average MSR across the industry is around 28 per cent to 30 per cent.

CIMB added that it believed the banking sector was in better financial health than it was in 2007 and 2008.

"While average TDSR will be higher, we believe this ratio is still substantially lower than 60 per cent," CIMB said, noting that its ground checks suggested that the usage of guarantors for home loans in order to dodge tighter loan-to-value limits was not a prevalent trend.

An OCBC Investment Research report yesterday estimated that the mortgage restrictions "could affect, off the bat, 5 per cent to 20 per cent of the current cross-section of buyer profiles".

The MAS wrote in a paper last month that an inspection of banks here found that some banks, when computing their internal debt servicing ratios, only looked at the loan being applied for and did not take into account a borrower's other existing debt obligations.

"Such lapses would lead to an incomplete determination of the borrower's total debt obligations and consequently inaccurate assessment of the borrower's repayment ability," MAS said.

"It is important that banks maintain sound credit underwriting standards and prudent lending practices to avoid the kind of excesses that had led to financial crises in other countries," it added.

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