Monetary Auth of Singapore Mortgage on fixed payment
A homeowner takes a mortgage loan to buy a home and repays the mortgage over a fixed period, say 20 years.

The ideal situation is for the bank to offer a fixed rate mortgage, so that the monthly repayment remains the same over the period of repayment.

In many countries, such as Singapore, the bank is not able to offer a fixed rate mortgage because their source of funding is on variable interest rate. 

It is the practice for the bank to offer a variable interest mortgage. In some cases, they can fix the rate only for a short initial period, say 3 years.

When the market interest rate rises, such as the case in 2022, they have to adjust the interest rate on their mortgages. With higher interest rates, the monthly repayment increases for the home owner. 
 

Initial	Interest	Repay	Annual	Monthly
Loan	rate	Year	repayment	repayment
800000	2%	20	48,925	4,077
800000	5%	20	64,194	5,350

The above example shows a mortgage loan of $800,000 to be repaid over 20 years. When the loan was taken, the interest rate was 2%. The monthly repayment was $4,077.

When the interest rate increases to 5%, the money repayment increases to $5,350. This is a 31% increase in the monthly payment, compared to $4,077 previously.

Many home owners are not able to afford the higher monthly repayment, due to their tight budget. They are not able to pay the additional $1,273 from their monthly income.

A better arrangement is for the monthly repayment to remain fixed at $4,077 and for the loan to be repaid over a longer period. If the interest rate remains at 5%, the loan can be repaid in 35 years. 

It is likely that the interest rate will not remain at a high level for many years. When it reduces in the future, the loan can be fully paid in less than 35 years.

The home is probably on a freehold or a 99 year leasehold. Even if the mortgage is repaid over 35 years, the property still has many years of remaining lease. 

This arrangement cannot be offered for properties with a remaining less that is shorter than, say, 50 years. Most properties have a longer remaining lease.

Suggestion

I suggest that the Monetary Authority of Singapore should require banks to offer existing home owners to convert their mortgage to this new arrangement, i.e. that they can fix their monthly repayments at the current level, and repay the loan over a longer period. The repayment period does not need to be fixed, i.e. it will continue until the loan is fully repaid.

Tan Kin Lian


 

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