The Business Times
By Siow Li Sen
Such loans to face the same loan-to-value limits as the latest property measures
THE Monetary Authority of Singapore (MAS) has stepped in to close a loophole on mortgage equity financing (MEF), by imposing the same lower loan limits as the latest property measures.
It has proposed that mortgage equity financing – where banks offer loans based on the owner’s equity in their homes – be subject to the same loan-to-value (LTV) limit of 80 per cent for those with only one home loan; 60 per cent if there is more than one home loan; and 50 per cent for non-individual borrowers.
By restricting the amount that can be borrowed through mortgage equity financing, MAS has cut off or severely narrowed one route for property buyers who need to raise more cash if they want to buy a second or third property.
Currently, there is no LTV rule on MEF though most banks lend 70-80 per cent of the value of the house.
MAS said the mortgage equity withdrawal loans (MWL) are subject to the financial institutions’ (FI) credit assessment of the borrowers. ‘Practices among FIs vary in the LTV limits that are applied . . . As a prudential measure, MAS plans to require FIs to comply with regulatory LTV limits on MWLs. The purpose of this policy is to apply the regulatory LTV limits, not just to loans used to purchase residential property, but to loans secured on residential property as well,’ it said.
MAS also said that when assessing the LTV computation, FIs should aggregate loans taken from moneylenders, if any, which are used to pay for the property.
MEF would have become more prevalent given the sharp run-up in property prices and is popular with borrowers as banks charge a much lower interest rate compared with unsecured loans.
Last year, private home prices rose 17.6 per cent and have since eclipsed the previous 1996 peak.
The interest rate charged on MWLs if structured as an overdraft is typically the bank’s prime rate plus 1 or 2 per cent, against double-digit rates for unsecured loans. The average prime rate here is 5.38 per cent.
Also, like overdrafts, borrowers pay interest only on the amount they use.
Banks said MEF is not a big business though many advertise it on their websites and some target customers whose home loans have been paid down.
A Maybank spokeswoman said: ‘We have always adopted a prudent approach to MWLs and offer a lower quantum than for financing purchases of property.’
Dennis Khoo, Standard Chartered Bank Singapore’s head of consumer banking, said the bank offers mortgage equity financing as part of its comprehensive suite of mortgage solutions.
‘The same loan review and credit assessment process are applied across all mortgage loan applications, including looking at the customer’s total credit facilities, monthly income and repayment habits,’ he said. ‘Responsible lending is our priority – the important thing for us is to work with our customers to ensure we strike a balance between the need for financing and the ability to service the loan.’
The deadline for written feedback on the above proposal is Feb 14.