Higher interest rates aren’t deterring property buyers, but a lower borrowing cap could
Higher interest rates aren’t deterring property buyers, but a lower borrowing cap could. Prime Minister Lee Hsien Loong remarked in his National Day statement that the world is “unlikely to return anytime soon to the low inflation levels and interest rates that we have enjoyed in recent decades.”
Indeed, such prospects should give multi-property owners a lot to unpack – and worry about. Prof Sing claims that even a 1% increase in interest rates might have a “significant impact” on homeowners’ monthly payments, depending on the amount borrowed from banks. According to MoneySense’s mortgage calculator, a 30-year S$500,000 loan at 1% annual interest would result in a monthly repayment of S$1,608.
When loan rates rise to 3%, monthly repayments rise by 31% to S$2,108, significantly more than most people can anticipate to get in annual wage increases. If interest rates were to climb further to 5%, the borrower would face greater monthly repayments of S$2,684 – a 66.9% increase. While this could be extremely costly, there is also the impact on the loan’s amortisation schedule to consider, in addition to the immediate blow to one’s monthly cashflow.
According to Darren Goh, managing director of MortgageWise.sg, borrowers will be influenced by the weightage of principle reduction and interest components in monthly repayments. “When the interest rate is 1.5 percent – which many of us are accustomed to – “you see your loan drop down quite quickly, since… roughly 70% of what you pay every month reduces your loan and only 30% is interest,” he explained. “If it’s 3.5%, the pendulum swings the other way.” Despite the possibility of a rising debt burden, many market observers appear unfazed – at least for the time being. Bank floating rates ranged from 1.9 percent to 2.1 percent in early August, according to statistics from the MortgageWise website.
The rigorous borrowing criteria for Singapore home loans will also keep this in check. In Singapore, homebuyers are subject to a total debt servicing ratio (TDSR), which limits a mortgagor’s total debt obligations to 55% of income. This ratio is calculated by multiplying mortgage liabilities by 3.5 percent or the current market rate, whichever is greater. “The TDSR works as a kind of cushion or buffer against overextending leverage,” says Leonard Tay, head of research at Knight Frank Singapore. “They have the buffer for interest rates to rise without the financial situation being debilitating.”
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