Singapore household debt drops to lowest in over a decade

High interest rates deter borrowing, income growth keeps leverage risks low: MAS

- Ovais Subhani S

Singaporeans have reduced their debt levels as high interest rates discouraged them from taking new loans and healthy income growth helped them pay off their obligations, the central bank said in a report released on Nov 27.

Aggregate household debt fell for the eighth consecutive quarter to 1.2 times personal disposable income in the third quarter of 2023, the lowest level in over a decade, the Monetary Authority of Singapore (MAS) said in its Financial Stability Review for this year.

MAS said that households have exercised caution in taking on additional loans due to the increase in interest rates since the second half of 2022, resulting in a decline in the amount of money they owe from a year ago.

Interest rates in Singapore, as measured by the three-month compounded Singapore Overnight Rate Average, which is used as a benchmark to price loans including mortgages, rose to more than 3.5 per cent in the second half of 2023, from less than half a per cent in the first half of 2022.

The biggest drop has been in personal loans, which represent about a quarter of the aggregate household debt.

Income growth and financial buffers – in the form of extra savings – also cushioned rising debt servicing costs for households and helped to keep non-performing loan (NPL) rates and leverage risks low.

Leverage risks are defined as the vulnerability of borrowers to an increase in debt relative to income, putting them at risk of not being able to meet their repayment obligations.

To ascertain the financial resilience of households, the central bank also carried out stress tests on how borrowers would fare in drastic economic scenarios.

Those tests showed that most borrowers refinancing into more expensive home loans would be able to handle higher monthly repayments should there be further hikes in interest rates or income losses.