MAS Issues Revised Housing Loan Rules

Singapore, 19 July 2005...The Monetary Authority of Singapore (MAS) today announced that banks may grant housing loans of up to 90% of the property value.  Currently, MAS' housing loan rules cap the loan-to-value (LTV) limit at 80%.

2. As part of the minimum 10% downpayment by the borrower, the minimum cash component for purchases of private residential properties has also been reduced from 10% to 5%. In tandem, the Government has decided to reduce the cash downpayment for HDB flats financed with bank loans to 5%, instead of the originally slated 10%¹ on 1 January 2006.  This will align the cash downpayment for both HDB and private property.

3. The LTV limit of 80% was introduced in 1996, at a time when the property market was overheating. However, the 80% LTV was intended not as a counter-cyclical measure, but at ensuring sound bank lending practices across property market cycles. The 20% downpayment by borrowers provided a buffer for banks against fluctuations in property prices and losses on mortgage loans. This was particularly important as bank mortgages ranked after borrowers' own CPF claims on the properties. 

4. In 2002, Government reversed the order of priority of charges so that financial institutions held the first charge for a property ahead of CPF. Further, borrowers were allowed to use their CPF savings for up to 10% of the 20% downpayment for private property purchases. In the last three years, the market has had time to adjust to these major changes. Banks now have first claim status for over two-thirds of their outstanding housing loans.

5. MAS has assessed that it is now appropriate to raise the LTV limit to 90%. This change will give banks more room to assess risk, and enable them to offer certain consumers a wider range of financing options when purchasing a property.

6. The 10% downpayment will continue to deter over-borrowing by purchasers and reduce potential losses to banks from borrower default.  To mitigate the increased risk that banks will take, MAS will require banks offering such loans to hold higher capital in line with its current capital adequacy rules². MAS also expects banks to apply rigorous internal credit evaluation criteria before extending high LTV loans. This is similar to the approach taken in certain other well-regulated jurisdictions. Property buyers on their part should exercise financial prudence in their purchases and ensure that they can comfortably service their loans.

7. These changes in housing loan rules are not designed for the short term, or to address immediate market needs. They are part of MAS' longer term shift to a risk-focused supervisory approach towards banks and financial institutions. We have been refining our prudential policies and rules in recent years, to provide financial institutions greater leeway to make their own risk decisions, subject to sound risk management practices. MAS has focused increasingly on supervision of banks' internal risk practices, rather than one-size regulation.  

8. MAS is prepared to consider mortgage insurance as an alternative to higher capital charge as a risk mitigant for high LTV loans. We will be exploring its commercial viability with the industry. MAS will also study the appropriate regulatory framework for mortgage insurers. 

9. The changes apply to private property transactions where the date of the option to purchase, or, if there is no option to purchase, the date of the sales and purchase agreement falls on or after 19 July 2005. For HDB flats financed by bank loans, the increase in the LTV limit would apply to transactions where the date of booking for new flats, or the date of receipt of resale application for resale flats, falls on or after 19 July 2005. The 5% cash downpayment will apply to purchases of new flats booked on or after 1 January 2006, and resale flats where the application to HDB is received on or after 1 January 2006.

¹ The 5% cash requirement for private properties will take immediate effect, while that for HDB flats will apply to flats purchased from 1 January 2006.

² The risk weight for computing the capital requirement will be 100% for housing loans exceeding 80% LTV compared with 50% for loans within 80% LTV.