On Tuesday, the Monetary Authority of Singapore (MAS) announced that it was distressed over the rising household debt in Singapore.
Why household debt in Singapore is rising
The managing director of the MAS, Ravi Menon expressed his concerns over the rising household debt in Singapore as it threatens the financial stability of the country. He explained that it could be attributed to low interest rates and stretched loan tenures.
Mr. Menon further added, "The vast majority of mortgage loans in Singapore are on floating rate packages, which means households will face higher monthly repayments when interest rates normalise."
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Mr. Menon said that an estimated 5-10% "have probably over-leveraged on their property purchases, that is, they have total debt service payments at more than 60 percent of their income." He emphasised that it was "important to act now to limit build-up of leverage".
Facing consequences
The rising household debt in Singapore could produce many consequences. For example, if interest rates were to rise back to normal levels, both households and banks would be adversely affected. This is especially so for households that are not very stable financially and thus, may have trouble if mortgage rates were to increase.
Mr. Menon stated that an increase in mortgage rates by just 3 percentage points could increase the proportion of borrowers at risk to 10 to 15 per cent.
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In light of all these news, it is probably advisable for everyone to consider carefully before they decide to take up a bank loan. Banks should also exercise more discretion when giving out loans so as to alleviate the problem of rising household debt in Singapore. Saving would also probably be a good idea now to cope with a heavier financial burden in the future.
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Mr. Menon also announced that while Singapore's economy grew by 1.3 per cent in 2012, it is likely that its economy will live up to the growth forecast of 1 to 3 per cent in 2013. The MAS states that "GDP growth should pick up over the course of the year amid an improving external environment".
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