Widely circulated data from Singapore's Credit Bureau suggest that there has been a rise in home loan defaults in the past few years. For example, the number of mortgage defaults in 2018 (156) was up 39% from 2017 (112), and was more than double the number from 2015 (65). Similarly, the number of mortgagee listings (home listing by lenders, usually following defaults) have increased more than two fold since 2015. Should consumers be concerned about a downturn in the housing market?
Why Are Mortgage Defaults on the Rise?
There are a number of reasons that mortgage defaults may have increased in recent years. First, as interest rates have gradually risen from a trough, mortgages have become more expensive for borrowers. This type of rise can result in increased monthly loan bills. For example, a S$250,000 home loan with an interest rate of 2% will require a monthly payment of about S$1,060. If this rate increases to 3% the monthly payment will jump to S$1,186, which can be a significant financial burden for those on a tight budget.
For this reason, homeowners and buyers should keep an eye on SIBOR and SOR as well as interest rate announcements made by the U.S. Federal Reserve. All of these rates are highly correlated with mortgage rates and therefore influence the total cost of their homeownership.
More Than Meets the Eye: Rise in Defaults Doesn't Necessarily Mean Higher Risk
While it is certainly worth keeping an eye on interest rates and mortgage default figures going forward, not all housing market indicators are as gloomy. For instance, the percentage of non-performing home loans has remained at just 0.4% since 2014, according to the Monetary Authority of Singapore. This suggests that while there has been a rise in the total number of defaults, the proportion of all home loan borrowers that are defaulting has not increased. Instead, there may have been an increase in the number of loans issued. There appears to be evidence for this judging by the rise in property transactions since 2014.
Additionally, recent policy measures may have provided additional stability to the housing market. For instance, Singapore's tightened loan-to-value (LTV) restrictions mean that homeowners are less burdened with mortgage debt. For instance, the average LTV ratio down to 49.9% in the second quarter of 2019 (51.5% in Q2 2018 and 53.5% in Q2 2017).
Finally, real estate developers appear to be confident about the housing market. There were 13,290 private property building commencements in the half of 2019 alone, more than any annual total since 2013. This suggests that developers expect strong demand for housing going forward. This expectation may be justified as the Urban Redevelopment Authority (URA) price index for private homes increased by 0.9% in Q3 2019 compared to Q2 and is up 1.7% on the year. Additionally, HDB resale prices stabilized slightly with a 0.1% rise in Q3 2019 after 4 quarters of decline.
How Should Homeowners React?
While these factors should put consumers at ease, it is important to also note that Singapore's GDP growth has slowed significantly in 2019. This may suggest a new factor in home loan defaults in 2019 and in the near future and is something to monitor. However, as a homeowner or a prospective one, there's not much you can do about major changes in the housing market. With that said, there are simple steps that you can take to give yourself the best chance for financial stability. In general, we strongly agree with the Credit Bureau's recommendation that proper planning can help prevent financial when it comes to borrowing.
Shop for Homes You Can Afford
As a prospective homeowner, it is important to ensure that you have enough cash and CPF funds to make a downpayment on your new home. For example, first-time homebuyers must put down at least 25% of their new home's price. This requires you to carefully design a budget based on your savings before you start searching for a new home.
Carefully Compare Interest Rates & Loan Terms
It is also essential to obtain a loan with terms that you understand and a monthly repayment requirement that you can afford. To get a better idea of how much different interest rates will translate to monthly loan payments, it can be useful to use tools like ValueChampion's free home loan calculator. This interactive page allows you to compare the most up-to-date home loan rates as well as to estimate the total cost of various loan sizes. Additionally, we recommend analysing the best mortgage loan terms depending on your preferences for private or HBD flats, fixed versus floating rates or ability to refinance. The more you know about your home loan the less likely you will be to have an unfortunate surprise down the road.
Consider Refinancing Options
For those that already own a home and mortgage, it is always worth considering home loan refinancing. Lenders often compete for business by offering competitive rates to obtain new customers. This is always worth considering, but is often advantageous when market rates decrease, which emphasises the importance of keeping an eye on the U.S. Federal Reserve, SIBOR and SOR.