Loan Tenure
MAS Restricts Loan Tenure for Residential Properties. Aiming To Curb Continued Upward Pressure On Residential Property Prices In Singapore
With effect from 6 October 2012, Monetary Authority of Singapore (MAS) restricts the loan tenure granted by financial institutions for the purchase of residential properties in Singapore. This will apply to both private properties and HDB flats.
- The loan tenure to be capped at 35 years. This will apply to loans to both individual and non-individual borrowers, as well as refinancing loans.
- Loans exceeding 30 years loan tenure, or the loan period extends beyond the retirement age of 65 years, will face tighter loan-to-value (LTV) limits.
Borrowers with longer loan tenure will end up paying more as interest compounds and accumulates over a longer period, which will cause a larger debt repayment burden on borrowers.
Borrowers may be mislead by the current climate of low interest rates, over-estimate their ability and taking a bigger loan which beyond what they can really afford. When the correction comes, the interest rates rise, borrowers who have overcommitted themselves will have financial difficulties servicing their loans.
All these pose risks to the financial institutions. The consequences could be, financial institutions may be caught holding more bad loans.
Government is taking this step to encourage more prudent lending, aiming to avoid a price bubble and fostering long term stability in the residential property market in Singapore.
Loan tenure is determined by Income Weighted Average Age of Borrowers (all borrowers must be mortgagors)
Following is a simple illustration for your easy reference:
| Younger Borrower Earns Higher Income | Older Borrower Earns Higher Income | |
|---|---|---|
| Borrowers’ Age & Income | A age 30 earns $7000 per month B age 50 earns $3000 per month |
A age 30 earns $3000 per month B age 50 earns $7000 per month |
| Income Weighted Average Age (IWAA) |
= (30 x $7000) + (50 x $3000) / $7k + $3k = ($210,000 + $150,000) / $10,000 = 36 years |
= (30 x $3000) + (50 x $7000) / $3k + $7k = ($90,000 + $350,000) / $10,000 = 44 years |
| Maximum Loan Tenure for 80% Loan-To-Value |
= 65 years – 36 years = 29 years |
= 65 years – 44 years = 21 years |
| Outcome | Lower IWAA Longer Max Loan Tenure |
Higher IWAA Shorter Max Loan Tenure |
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