Rising interest rates set to pressure mortgages

Recent headlines suggest an oncoming storm – as property prices come down, speculators are clearing out the market, leaving banks holding the bag.

In the case of Marina Collection in Sentosa Cove, lender UOB is suing the developer and several homebuyers after 37 out of 38 units there defaulted. Now, rising interest rates only seem to add to the gloom – since the start of the year, three-month SIBOR, a benchmark most mortgages are tied to, has risen almost by half to 0.65 per cent.

Even before that, the Monetary Authority of Singapore (MAS) said the housing non-performing loan ratio rose for the first time in three years, ticking up to 0.4 per cent in the third quarter of 2014.

Analysts said that more defaults are inevitable, however there is no need to hit the panic button just yet. Mr Cyrus Daruwala, managing director of IDC Financial Insights, said: “Anybody who has been punting, anybody who has been speculating and overextended, this marginal creep up of half a percentage point for example, that is going to get to them.

“But the real non-performing loans, I think we are going to budge from 0.8 per cent to maybe 0.9 per cent – it is still under 1 per cent of the total portfolio.”

That is in part because the Government put a limit on how much financing buyers can obtain during the bull market, and those measures are giving banks ample headroom as the market turns. In fact, some analysts said that a steady rise in interest rates could be good for banks – by making their loan portfolios even more profitable.

Mr Ivan Tan, a director at Standard & Poor’s, said: “When you look at the funding side, a lot of it is current or savings deposits, retail deposits, so there is a repricing gap.

“Generally, banks are slower to revise up interest rates for their deposits, whereas the loan repricing is quite fast. So between the loan repricing and deposit reprising, there is some interest margins to be had.”

The wild card now is the jobs market. If the past is any guide, analysts said that Singapore homeowners do not usually bail on their debt unless they lose their paychecks.

Source : Channel NewsAsia – 20 Jan 2015

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