SINGAPORE – Property-related foreclosures are at a record low at DBS, said the bank, and it is confident that the numbers will remain in the low single digit until year end.
Foreclosures happen as a last resort when an owner is unable to service his loan and the bank repossesses the property.
But rules over how much a person can borrow and banks’ prudent approach are among factors that have helped keep delinquencies at bay in Singapore.
Mr Nelson Neo, head of the retail customer segment at DBS Consumer Banking Group, said the foreclosure numbers at the bank after the Covid-19 pandemic were “much lower” than before.
DBS’ experience ties in with the overall picture on foreclosures in Singapore’s property market.
Minister of State for Trade and Industry Alvin Tan said in Parliament in May that there has not been a pick-up in property-related foreclosures so far this year. He noted that five commercial and five residential loans were foreclosed by financial institutions in the first quarter.
There were an average of four commercial and 12 residential foreclosures per quarter in 2022.
The latest financial stability review from the Monetary Authority of Singapore (MAS) in November stated that the “number of foreclosures has trended down since 2021 and remained low at fewer than 30 units” between January and November 2022.
DBS has a market share of just under 29 per cent of the housing loan market, according to a transcript of its media briefing that was held after its fourth-quarter results in February.
Tracking the annual average foreclosure number for 2021 and 2022 (post-pandemic), it found that it experienced one-third of the figure for 2018 and 2019 (pre-pandemic).
Mr Neo, who also heads POSB, added that the foreclosure numbers in 2022 were actually “a very low single-digit number” and that “has remained quite consistent so far in 2023”.
“We are confident that the foreclosure numbers will remain at the low single digit until the end of 2023,” he said. DBS added that the numbers are below the industry average of delinquencies.
MAS data showed that the non-performing loan ratio for housing and bridging loans has stayed at 0.2 per cent in the fourth quarter of 2022 and first quarter of 2023, down from 0.3 per cent in the first three quarters of 2022.
Foreclosures have remained manageable because safeguards, like the total debt servicing ratio (TDSR) and mortgage servicing ratio (MSR), prevent people from taking on too much debt.
TDSR limits a borrower’s total monthly instalments (for property, car, credit card and any other loans) to 55 per cent of gross monthly income. MSR limits monthly instalments of property loans to 30 per cent of gross monthly income.
MSR applies only to housing loans for a Housing Board flat or an executive condo.
The stress-test interest rate used to calculate the TDSR and MSR has also gone up to 4 per cent from 3.5 per cent. A stress-test interest rate of 3 per cent is also used for loans from HDB. There was no such requirement previously.
A higher stress-test interest rate means a borrower’s monthly interest payments that will go into the TDSR calculation will go up.
This effectively means he can take only a smaller loan than previously, when the stress-test rate was lower, so his monthly interest payments will meet the TDSR requirement of 55 per cent, assuming no change in income.
Financial institutions also have buffers against falling property valuations as the loan-to-value (LTV) ratio is kept below 100 per cent.
The loan amount as a percentage of the property’s value is 80 per cent for an HDB loan and 75 per cent for a bank loan.
In reality, the average LTV ratio has always been lower, with the latest first-quarter one at 41.6 per cent, according to the MAS monthly statistical bulletin. This buffer ensures that the property value has to plunge by more than 58.4 per cent (100 per cent minus 41.6 per cent) before the bank is at risk.
“Banks are also not in the business of taking the property,” said Professor Sing Tien Foo from the department of real estate at the NUS Business School.
He added that banks want “the borrower to continue to service the loan” and so foreclosure is “the last resort”.
DBS had two loan packages over the past two years which protected its customers against rising interest rates. The first package kept interest rates at 1.5 per cent for five years, and the second one capped interest rates at 1.4 per cent to 2.3 per cent over the duration of the lock-in period, which can range from two, three or five years. DBS ceased the interest rate cap feature in December 2021.
Mr Neo said 60 per cent of HDB home loan customers are protected through the rate hikes, adding that “out of this 60 per cent, 70 per cent will be protected all the way until the end of 2024”.
He noted that about 50 per cent of private property customers are on fixed rate loans, and this has cushioned them against the rate hikes.
Home loan rates in Singapore shot up from around 1.15 per cent in the fourth quarter of 2021 to over 4 per cent in November 2022. Interest rates in Singapore track those in the US, where the Federal Reserve has raised rates 10 times since March 2022 to a range of 5 to 5.25 per cent, to counter inflation.
Home loan rates have since moderated to around 3.55 to 3.6 per cent, said mortgage brokers.
But many home owners are used to much lower rates than these and Prof Sing said those buyers who have stretched to their TDSR limit of 55 per cent will feel the strain if their “income does not go up” even as “their monthly mortgage payments increase”.
Mr Alfred Chia, chief executive of financial services provider SingCapital, shared an example of a client who bought a condo last year. He said her floating interest rate shot up from about 0.98 per cent to 4 per cent.
“Her instalments now exceed 55 per cent of income. A lot of income has now gone into servicing the housing loan. She has less left for savings, retirement and her daily expenses,” he added.
With interest rates expected to remain at current levels, Mr Chia said more problems will arise when an individual loses his job, or if he is a businessman and affected by the economic downturn.
The US Fed is set to resume hiking rates at least twice, after pausing last month.
There are four more Fed meetings this year – July 25-26, Sept 19-20, Oct 31-Nov 1, and Dec 12-13.
Mr Chia said he knows a businessman who “bought a very big property thinking his business will continue to be good”. Unfortunately, that did not happen and he was made personally liable for all his business debts.
“His creditors actually filed for bankruptcy against him and caused him to lose his property,” he added.
There are also instances where a home owner falls critically ill or dies, leaving the family to cope with the outstanding instalment payments.
Mr Chia cited the case of a businessman who was in his late 50s when he died of a heart attack.
“He still has an outstanding loan,” Mr Chia said, adding that a friend took a loan secured by his own property to help the family out.
Mr Chia noted that banks charge a higher interest rate when a home owner defaults on a loan.
“A lot of times, home owners do not read the terms and conditions. Once you miss your due date, the interest will start accumulating,” he added.
For home owners facing difficulties, Mr Neo said the bank reaches out to them to try to work out a financially viable solution..
It is “important for us to understand their individual needs and their family situation, so we can offer options such as extend their repayment terms, restructure their loan and also do some financial planning so that they are able to tide through”.
To play it safe, Mr Chia suggests that home owners’ total monthly debt obligations should not be more than 40 per cent of their income – to provide a buffer against, say, any rise in interest rates.
Mr Neo said home owners should have a rainy day fund of “at least six months” and, preferably, “two years’ worth of monthly home loan instalments”.
“Source:[DBS expects its property-related foreclosures to remain in low single digit until end-2023] © Singapore Press Holdings Limited. Permission required for reproduction”
