Singapore banks’ mortgage hikes near affordability tipping point

Singapore banks’ mortgage hikes near affordability tipping point
DBS Group raised the fixed rate on all of its home loan packages to 3.5% on Tuesday, according to its website. (PHOTO: REUTERS/Edgar Su)

By Nurin Sofia

(Bloomberg) — Singapore’s near decade-long spell of low interest rates has ended, with mortgage rates nearing an affordability tipping point that may hit borrowers’ disposable income and dent buyer demand.

The country’s biggest lender, DBS Group Holdings Ltd., raised the fixed rate on all of its home loan packages to 3.5% on Tuesday, according to its website. United Overseas Bank Ltd. bumped up its rates to as high as 3.85% for its three-year fixed product, while Oversea-Chinese Banking Corp. upped its two-year product to 3.5%.

“The low interest rate environment in recent years, which has been supporting residential buying demand, has come to an end,” Cushman & Wakefield Plc’s Singapore head of research Wong Xian Yang said. “Rising home loan rates create friction for the private homes market as buyers’ eroding purchasing power should dampen property demand.”

The banks’ revised lending rates are among the highest in recent years, according to Bloomberg Intelligence analyst Rena Kwok. If mortgage rates climb to about 4%, it would be a level not seen for almost two decades, she added.

Mortgage rates above 4% may squeeze borrowers’ disposable income and hurt their ability to cover necessities. It means a 20 to 30-year loan of every S$1 million (US$702,000) would require a monthly payment of about S$4,774 to S$6,060, according to BI’s analysis. That compares with the average Singaporean monthly nominal wage of S$5,847. In Singapore, about 80% of people live in public housing where homes normally cost well below S$1 million.

Mortgage Squeeze

Any squeeze would be an abrupt change for Singaporeans, who have mainly brushed aside concerns about rising interest rates that have impacted property markets from Canada to New Zealand. It’s meant Singapore has largely defied the global real estate downturn, with home prices in the island-state jumping 3.4% in the third quarter from the previous three months.

UOB said it was encouraging homeowners to speak with their banks to better understand how changes in interest rates will affect their home loans and the steps they can take to mitigate any adverse risk, Jacquelyn Tan, the bank’s head of group personal financial services, said.

While borrowing costs in the city-state have risen over the past year alongside global rates after the Federal Reserve’s aggressive rate hikes, they are still considerably lower than many other nations. In the US, the average contract rate on a 30-year fixed mortgage pushed north of 6.5% late last month for the first time since 2008, while in the UK, the average two-year fixed-rate on a home loan climbed to 5.97% on Tuesday.

It’s not the first time banks in Singapore have upped their rates this year. In June, DBS increased its home loan fixed rate packages to 2.75%, while UOB marked up its three-year fixed rate package to 3.08%, the Straits Times reported.

©2022 Bloomberg L.P.