Stress Test Interest Rate Singapore – Banks Compared!

As US interest rates have risen significantly and are likely to continue, the Monetary Authority of Singapore (MAS) stepped in pre-emptively to tighten loan quantum limits. MAS has raised the stress-test interest rate by 0.50%, also known as the medium-term interest rate floor, to ensure homebuyers borrow within their means amid rising interest rates.

The stricter criteria help determine if a borrower can handle future interest rate spikes and still manage to allocate a percentage of their income to debt servicing.

What is the interest rate stress test?

The interest rate stress test, also known mortgage stress test, is a financial assessment used by banks or other lenders to assess a borrower’s ability to repay a mortgage loan under adverse financial conditions, such as rising interest rates.

For the interest rate stress test, a higher (hypothetical) “stress” rate is used to calculate a borrower’s potential monthly mortgage payment. Other housing-related expenses, such as property taxes and insurance, may also be factored in. In Singapore, the stress-test interest rate is typically set at a specified percentage above the prevailing market interest rates.

Here, borrowers need to demonstrate the ability to manage their mortgage payments not only at the current market interest rates but also at the higher stress-test rate.

The lender then assesses whether the borrower’s income and financial situation can support these higher mortgage payments based on the stress interest rate. As long as homeowners can pass the interest rate stress test, they should be able to pay their mortgages.

The primary purpose of this stress test is to ensure that borrowers can comfortably afford their mortgage payments even if interest rates rise significantly during the loan tenure.

Note that the interest rate stress test protects both borrowers and lenders. For borrowers, it ensures that they do not overextend themselves financially by taking on a mortgage that could become unaffordable if interest rates rise. For lenders, it reduces the risk of loan defaults and foreclosures in the event of interest rate increases.

The interest rate stress test also plays a role in loan approval. If the borrower can comfortably afford the mortgage payments under both the current market interest rate and the stress-test rate, their mortgage application may be approved.

If not, the lender may still offer a lower loan quantum for a more manageable debt burden or require the borrower to improve their financial situation before approval.

What is the stress test rate for banks in Singapore?

With the steep rise in interest rates in 2022 and approaching the 3.5% interest rate levels, the increase in stress-test interest rate was expected.

On 30 September 2022, MAS raised the stress-test interest rate by 0.5% point to 4% (up from 3.5%) for property loans from private financial institutions like banks to compute the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR), which in turn affects the loan eligibility.

Type of loan	Stress rate (or Medium-term interest rate)
Residential property purchase loans and mortgage equity withdrawal loans	The higher of a 4% p.a. floor (up from 3.5% p.a.) or the thereafter interest rate*.
Non-residential property purchase loans and mortgage equity withdrawal loans	The higher of a 5% p.a. floor (up from 4.5% p.a.) or the thereafter interest rate.

*The thereafter interest rate represents the maximum interest rate that can apply throughout the duration of a property loan, excluding any introductory or promotional rates.

In other words, the government tightened maximum loan quantum limits for mortgages due to the increasing market interest rates and expectations of further increases. MAS now uses stricter criteria to calculate the TDSR and MSR of potential borrowers and assess their ability to repay and, therefore, qualify for a loan.

Do note that the stress rate indicated by MAS of 4% is only a guiding principle and banks may set their own stress rates depending on their internal risk assessments of the interest environment and borrowing costs. The table below compares the different stress rates from major banks in Singapore.

Best stress test rates for banks in Singapore:

Banks	Stress Test Rate
DBS	4.65%
Citibank	4.65%
CIMB	4.70%
OCBC	4.70%
Maybank	4.75%
Standard Chartered	4.75%
UOB	4.75%
HSBC	4.75%

How does the stress-test interest rate framework work?

As discussed, the new stress-test interest rate framework ensures prudent borrowing for property purchases in a higher interest rate environment. Here’s how it works:

a. In Low Mortgage Rate Periods: When mortgage interest rates are low, financial institutions (such as banks) must evaluate borrowers’ ability to service their debts at a higher interest rate (or stress-test interest rate). It means that even though borrowers might secure a mortgage at a lower interest rate, they are assessed for paying a higher interest rate. This precaution ensures borrowers can handle their mortgage payments if interest rates rise.

b. In High Mortgage Rate Periods: When interest rates rise and surpass the stress-test interest rate, financial institutions must calculate the TDSR and MSR for borrowers using the highest applicable interest rate over the entire duration of the property loan. In other words, borrowers are stress-tested against the most significant potential interest rate increases that could occur during their loan tenure.

When do the stricter stress-test rates apply?

The tightened loan quantum limits and stricter stress-test rate criteria are applied only to:

• Loans for the purchase of properties with Option to Purchase (OTP) granted on or after 30 September 2022. If there is no OTP, then for Sale and Purchase (S&P) Agreement dated on or after 30 September 2022.

• New mortgage equity loan applications made on or after 30 September 2022.

Note that these stress-test interest rates do not represent the actual interest rates on your home loan, so they do not directly determine the interest you will be required to pay. The actual interest rate for home loan mortgages will still be determined by the lender or bank. The stress-test interest rate will only impact the computation of TDSR and MSR.

Consequences of increased stress-test interest rates on housing affordability

With the revised 4% p.a. stress-test interest rates, the maximum home loan amount borrowers can qualify for will be lower, whether buying an HDB flat or a private property. That makes it more challenging for some homebuyers to afford the properties they desire, especially if they are highly leveraged.

1. Reduced Affordability for HDB Flats

The new stress-test interest rates are particularly impactful for HDB flat buyers.

Consider a scenario where a household earns a combined monthly income of S$6,600 in Singapore. Without factoring in the 3% stress-test interest rate, you could afford an HDB resale flat priced at $540,000, the median price in September 2022.

However, your home affordability changes when the 3% stress-test interest rate is applied. With a 25-year HDB loan, you can no longer afford the same HDB flat because your estimated maximum loan amount decreases.

Stress-Test Interest Rate	Estimated Maximum Loan Amount	Estimated Maximum HDB Flat Price	Estimated Monthly Instalment (at 2.6%)
2.6%	$436,441	$545,551	$1,980
3%	$417,535	$521,919	$1,894
Percentage Change in Affordability	-4.3%	-4.3%	-4.3%

This table shows how different stress-test interest rates impact the maximum loan amount, the maximum price of HDB flats, and estimated monthly instalments under the assumption of a 2.6% reference interest rate. The percentage change is also provided for each scenario.

This reduction in affordability may necessitate buyers to explore other options, such as lowering debt obligations, increasing income, boosting their downpayment, or considering cheaper properties.

Eligibility for resale grant eligibility, including Family Grants, Enhanced CPF Housing Grants, and Proximity Housing Grants (PHG), can also reduce the loan amount buyers need to borrow.

Impact of HDB Loan Interest Rates on Affordability (if you’re taking an HDB loan)

Household Monthly Income	Price of HDB Flat You Could Previously Afford (at 2.6% Interest Rate)*	Price of HDB Flat You Can Now Afford (at 3% Interest Rate)*	Percentage Change in Affordability
$4,000	$330,638	$$316,315	-4.3%
$6,000	$495,956	$474,473	-4.3%
$8,000	$661,274	$632,629	-4.3%
$10,000	$826,593	$790,786	-4.3%

*Assuming a 25-year HDB loan with an LTV ratio of 80% and an MSR of 30%, without considering grants and excluding other mortgage or debt commitments.

The table above compares how different monthly household incomes affect the affordability of HDB flats under varying HDB loan interest rates, displaying both the previous and new affordability figures and the percentage change.

Impact of Bank Loan Interest Rates on HDB Flat Affordability (if you’re taking a bank loan)

Household Monthly Income	Price of HDB Flat You Could Previously Afford (at 3.5% Interest Rate)*	Price of HDB Flat You Can Now Afford (at 4% Interest Rate)*	Percentage Change in Affordability
$4,000	$319,601	$303,124	-5.2%
$6,000	$479,403	$454,685	-5.2%
$8,000	$639,203	$606,248	-5.2%
$10,000	$799,004	$757,809	-5.2%

*Assuming a 25-year bank loan with an LTV ratio of 75%, an MSR of 30%, without factoring in grants, and exclusive of any additional mortgage or debt obligations.

This table illustrates how different monthly household incomes impact the affordability of HDB flats under varying bank loan interest rates, showing the change in affordability when the interest rate increases from 3.5% to 4%.

In conclusion, the stress-test interest rate plays a significant role in determining the affordability of HDB flats, impacting the choices available to prospective buyers based on their financial circumstances.

2. Reduced Affordability for Private Property

Imagine you and your partner have a combined monthly household income of $8,500 in Singapore, and you were eyeing a resale condominium priced at $1,380,000, the median price of a resale condo in September 2022.

However, things changed when the stress-test interest rate for bank loans increased to 4%. It means that with a 30-year home loan, you can no longer afford that condominium.

Here’s how it breaks down:

• Under a 3.5% stress-test interest rate, you could manage a loan of $1,041,099 for the condo.
• But with the new 4% stress-test interest rate, your loan amount drops to $979,231.
• It also impacts your monthly repayment (2.75%), which decreases from $4,250 to $3,998.

So, unless you take actions like reducing your other debts or opting for a less expensive property, your affordability takes a hit due to the higher stress-test interest rate.

Impact of Increased Stress-Test Interest Rate on Condo Affordability for Different Household Incomes

To illustrate further, if your household income varies between $14,000 and $20,000, the condo prices you can afford also decrease by approx. 5.9% across the board under the new stress-test interest rate of 4%.

Household Monthly Income	Price of Condo You Could Previously Afford (at 3.5% Interest Rate)*	Price of Condo You Can Now Afford (at 4% Interest Rate)*	Percentage Change in Affordability
$14,000	$2,286,335	$2,150,469	-5.9%
$16,000	$2,612,955	$2,457,679	-5.9%
$18,000	$2,939,573	$2,764,888	-5.9%
$20,000	$3,266,193	$3,072,099	-5.9%

*Assuming a 30-year bank loan with an LTV ratio of 75% and TDSR of 55%, without considering any additional mortgage or debt commitments.

The table above shows how different household incomes affect the affordability of condos under varying interest rates, displaying both the previous and new affordability figures and the percentage change.

This shift reflects the impact of higher interest rates on your purchasing power, making it more challenging to buy a condominium at the same price levels as before.

With the new increased stress-test interest rates, one can expect a drop in loan quantum of about 4% – 6% on various loan tenures for HDB and private properties. Should the mortgage rates in Singapore increase beyond 4%, higher interest rates would be applied as the stress-test rate instead.

The ripple effects of reduced home affordability on homebuyers

The increase in stress-test interest rates has far-reaching consequences for homebuyers and the property market in Singapore. Here are some of the notable effects:

Fork out more cash on top of the 25% downpayment

The increase in stress-test interest rates means that homebuyers must set aside additional funds beyond the 25% downpayment. This adjustment could place significant financial pressure on buyers, particularly those with limited savings or tight budgets. To meet the higher financial requirements, prospective homeowners may need to allocate a more substantial portion of their savings or consider alternative financing options, potentially impacting their ability to afford the property they desire.

Get smaller-sized properties

Reduced affordability may push buyers towards smaller-sized private residential properties to match their budget constraints. As their purchasing power diminishes, individuals may choose more compact property options as a practical response to financial limitations.

Buy lower-priced properties

Budget constraints stemming from reduced affordability might prompt buyers to select lower-priced properties. Buyers who were purchasing near their loan limit will now have to put in further consideration when buying more expensive flats. These options could be situated further away from public transportation or older condominiums, reflecting a trade-off between affordability and property features or location.

Market Cooling

The elevation of stress-test interest rates functions as a market-cooling mechanism, with the potential to curtail the growth of property prices and speculative activities. This measure promotes a more stable and sustainable property market by discouraging excessive price inflation and speculative behaviour among buyers and investors.

On the other hand, when the stress-test interest rates are raised significantly, lenders may become more selective in approving mortgages. Borrowers must meet stricter criteria to qualify for loans, including higher incomes or larger down payments.

Final Thoughts

The recent introduction of new stress-test interest rates has added a layer of complexity to the already intricate home financing process. Changes in Singapore’s stress-test interest rates have a direct and noticeable impact on the home affordability of buyers.

Higher stress-test interest rates can help mitigate interest rate risk for borrowers. If mortgage interest rates do rise further in the future, borrowers who qualify under these stricter conditions will be better prepared to handle increased mortgage costs. Homebuyers must carefully assess their financial situation and consider their options in light of these changes to make informed property purchase decisions.

With Dollarback Mortgage by your side, you can confidently embark on your home buying journey, knowing that you have the best support in the industry.