SINGAPORE – High interest rates in the US have filtered down to Singapore, driving up the costs of a mortgage, which is one of the biggest financial commitments for most households.
As a result, vulnerabilities are emerging in some segments of the population – such as those earning less than $5,000 a month and those aged 59 to 77 – according to a DBS Bank study and the latest trends report from the Central Provident Fund (CPF) Board.
Fixed home loan rates shot up to as high as 4 per cent to 4.5 per cent in 2022, while the Singapore Overnight Rate Average (Sora) went up from below 1 per cent at the beginning of 2022 to above 3 per cent by the year end.
Sora is the benchmark interest rate used to price floating-rate home loans.
Home loan rates have since come down to around 3.65 per cent to 3.75 per cent for fixed ones, and for floating rates, the Sora benchmark remains around the 3.6 per cent to 3.7 per cent levels.
For buyers who took up new home loans recently, monthly mortgage payments have been pushed up by a few hundred dollars, compared with early 2022.
First-quarter 2023 data from the Department of Statistics showed that a home loan now represents 73.4 per cent of a typical household’s total liabilities, up from about 71 per cent in the first three quarters of 2022.
The DBS study found that home loan customers who earn less than $5,000 are feeling the pinch of higher loan rates more than those at other income levels. Monthly mortgage payments for this group rose 12.2 per cent to 12.3 per cent over the year.
This is comparable with the median bank loan customer whose mortgage payments increased by 12.2 per cent.
But the study found that the bank’s customers who earn less than $5,000 are using more of their income growth for mortgage payments. For every $100 increase in income, these customers spend up to $50 to $60 on their mortgages. They are thus left with about $40 to save, spend or invest.
In contrast, loan customers in other income tiers are allocating about 40 per cent to 45 per cent of their income growth to mortgage payments.
DBS has one of the biggest shares of the local housing loan market, at just under 29 per cent, according to a transcript of its media briefing that was held after its fourth-quarter 2022 results in February.
The study also found that 60 per cent of its customers who earn less than $5,000 have floating-rate loan packages as at May 2023.
These customers currently pay about 1 percentage point more in monthly instalments than their peers on fixed mortgages. This is because floating rates are around 3.6 per cent now.
With DBS’ floating-rate package pegged at the three-month compounded Sora rate plus a margin of 1 per cent, the interest rate on its floating package is around 4.6 per cent per annum.
The interest rate for its fixed-rate package is 3.75 per cent.
The bank’s research analyst Foo Fang Boon said the increase looks manageable for now as incomes have continued to grow, helping to cushion the impact of rising mortgage payments.
Another bank, UOB, said its loan customers are not experiencing mortgage stress either, and it has not encountered a significant increase in delinquency or non-performing loans.
Its head of group personal financial services, Ms Jacquelyn Tan, said the majority of borrowers are servicing their home loans promptly.
“Even for segments that are more vulnerable, we do not see any significant deterioration in their mortgage portfolios,” she noted.
DBS’ Mr Foo cautioned that there are headwinds – if income growth moderates as the economy slows and interest rates continue to stay high.
“Customers earning below $5,000 may need to dig even deeper into their wallets when servicing their mortgages should income growth wane,” he added.
The study also showed that those who are between 59 and 77 years old are feeling the strain as their expenses rose 2 percentage points in May 2023 to 86 per cent of their take-home income, compared with 84 per cent in May 2022.
This means for every $100 of take-home income, they are spending $86 on expenses, $29 more than the median customer who spends $57. Expenses for the median customer actually dropped 2 percentage points, from 59 per cent in May 2022 to 57 per cent in May 2023.
CPF contribution rates also drop for members after 55 years of age, meaning an older worker and his employer contribute less to his CPF savings for every month of work.
Older workers who still have to service housing loans are hit by a double whammy – their cash savings drop because their expenses go up, and they have lower CPF contributions every month.
The latest trends report from CPF Board showed that a significant number of older members who use their CPF money for housing loan instalments do not have sufficient CPF savings for six months of housing instalment payments.
Those affected are 38 per cent of CPF members aged between 55 and 59, and 53 per cent of members above 60 years old. Together, they comprise around 44,000 members.
Financial advisers usually recommend a buffer of at least 12 months worth of monthly mortgage payments in the CPF Ordinary Account (OA).
Ms Lee Meng, executive financial services consultant at Gen Financial Advisory, said older workers, who are 55 and above, should generally have smaller loan balances left.
Most of them would have paid down their mortgages over the years. The ones who are facing difficulties probably upgraded from public to private housing in their late 40s or early 50s, she added.
Mr Christopher Gee, senior research fellow at the Institute of Policy Studies, said that as CPF contributions drop after a member turns 55, the amount in the OA is not growing at the same pace as before.
He added that the system is “designed to make sure that a home owner is not using CPF as home finance” by the time he is 55.
The home owner should have paid off his home loan by then, Mr Gee noted.
For older home owners with outstanding mortgages, Mr Gee said they will need to downsize.
“Sell their flat, move to a smaller place and pay off the loan.”
Older home owners with a private property can also downsize by moving to a four-room or smaller public housing resale flat.
Home owners aged 55 and older are not subject to the 15-month wait-out period for private home owners that was introduced in September 2022’s package of property cooling measures.
UOB’s Ms Tan said that home owners who are at least 65 can consider the Housing Board’s Lease Buyback Scheme, which allows them to monetise their flat, pay off any outstanding mortgage loan and top up their retirement account to receive more income in their retirement years.
In 2022, CPF data showed that 2,860 seniors took up the Lease Buyback Scheme, up 2.5 per cent from 2,790 seniors in 2021.
Younger home buyers who are feeling the strain should talk to their banks early to discuss repayment options. UOB’s Ms Tan said the bank will then be better able to understand the extent and expected duration of their financial situation.
There are various options that the banks have to reduce monthly instalments and make loan servicing more manageable.
Ms Maryanne Phua, head of home loans at OCBC Bank, said some options include switching to another pricing package and extending the tenure of the loan.
She added that OCBC will also work with customers on a suitable repayment plan that they can commit to.
Ms Lorna Tan, head of financial planning literacy at DBS, said financially strapped home owners below 55 years old can tap their CPF OA money to fund their mortgage and free up cash for daily expenses.
Once their financial health improves, Ms Tan said they can switch back to using more cash to pay their instalments.
Most importantly, a home is a big-ticket item so buyers need to do their maths properly right at the beginning when they purchase a property and take up a mortgage loan.
“Don’t overstretch yourself. Everyone wants to own their dream home, but we need to live within our means,” said DBS senior economist Irvin Seah.
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