Rates gaming on mortgage relief in Singapore set to unwind

Thu, Nov 12, 2020

Jamie Lee


ON THE surface of it, having S$29 billion or about 15 per cent of outstanding mortgages in Singapore at end-August under deferred payments, should ring some alarm bells.

But that headline figure masks some rates-arbitrage that has been taking place.

This is very likely in the regulators' careful supervision, as they introduced income impact as a qualifying term for mortgage moratoriums from this month.

The arbitrage attraction is clear. One mortgage promotion today is being sold at below 1 per cent to well-heeled borrowers. It reflects the collapse in benchmark rates and how banks are eager to dole out home loans that are secured against property collateral.

Even if borrowers are not enjoying sub-one per cent rates, home loans today are at roughly below 1.5 per cent. The three-month Singapore interbank offered rate early this month was decidedly under 0.5 per cent. At the start of the year, it was 1.775 per cent.

Here's how the rates arbitrage is done. Business owners, some of whom may not be in a pinch despite the pandemic, opt to take a debt holiday on their personal property.

Because today's mortgages rates are cheap, they think that they can tactically roll a bit of debt backed by their homes.

With that extra cash in hand, these business owners then use that money to pare higher-interest debt for certain business expenses. These could be payments for transport equipment, for example.

For those who are left relatively unscathed by the crisis - and did their sums right - the move can be a stroke of survival savviness, especially if they can ride on a recovery in certain industries shielded from Covid-19.

When Singapore authorities streamlined the way in which relief measures are being doled out by banks, they made sure that banks would readily permit debt relief.

This makes sense because of the heightened uncertainty brought on by the pandemic, and because banks by nature would tighten credit in risky times otherwise.

To push relief through, regulators said individuals would not have to show that Covid-19 had impacted their income. They did not have to state reasons for opting for mortgage deferment, either.

The intent would be to very quickly dole out relief to those faced with immediate financial difficulties. For those who wanted to build up cash buffers amid the grave uncertainty brought on by a black swan event, deferring repayment would naturally help too.

It is likely that regulators are aware that there is a segment of borrowers who had opted for a mortgage holiday even when there was no immediate need for the relief, and used the added cash for rates arbitrage.

Remaining on the hook

But in crisis times, such considerations should not overwhelm, and then penalise borrowers who truly need fast access to debt relief. At the same time, debt relief is not debt forgiveness.

Individuals on mortgage moratorium schemes remain on the hook as they take on more debt, and regulators have urged prudence.

This situation is in part why the Singapore banks have signalled that moratoriums are still masking the true impact that the crisis has had on borrowers.

The primary issue here is that government stimulus here and around the world has made it difficult to tell which companies are due to fall into distress under ordinary business circumstances.

But a side issue is also that there are pockets of individuals who are taking advantage of such schemes to bring down the finance costs of them doing business.

It remains unclear how large this group of borrowers is in Singapore. These cases are anecdotal in nature, and hard data is lacking on this front.

Banks cannot fully and completely tell which borrowers are truly in distress, and which are those taking moratoriums for an arbitrage.

But the picture may be clearer in a few months, as the Singapore authorities have from this month tightened some terms for mortgage relief.

Individuals who cannot resume making full loan repayments on their residential property loans can make reduced instalment payments pegged at 60 per cent of their monthly instalment, for a period of up to nine months.

But this option is available only to individuals who can prove their income has been cut by at least 25 per cent, with property loan payments that are not more than 90 days past due. This is regardless of whether they have taken up reliefs previously.

The Monetary Authority of Singapore has also said that as economic activities continue to open up, borrowers able to resume paying their loan instalments in full "should start doing so" from the start of next year.

All in, the latest targeted relief, and the regulatory signal that borrowers should restart their repayments soon, should wean off support. This is particularly so for those who took the opportunity to arbitrage.

In a few months' time then, bank shareholders can try to seek a fuller view of the extent of exposure that lenders have to truly distressed borrowers. This could provide better assurances that banks - including Singapore's Big Three - are amply providing for actual delinquent borrowers.