'Cliff effect' from loan moratoriums rollback not a concern: DBS

Singapore

NUMBERS from Singapore's largest bank DBS put to rest earlier concerns of a "cliff effect" from deferring mortgage payments, a scenario where many, especially the most vulnerable, may not be financially prepared to make payments when moratoriums are promptly rolled back.

However, the bank's analysis of Singapore's blanket mortgage deferment scheme also points to diverging fortunes between the higher- and lower-income segments of society.

According to DBS's latest analysis of data from some 1.2 million of its non-wealth customers last year, just 8 per cent of residential mortgages that were earlier placed under moratoriums had their deferments extended into January 2021.

Overall, moratoriums expired on Dec 31 last year, but the authorities in Singapore have put in place various support measures for individuals and businesses that continue to experience cashflow pressures.

For example, individuals with property loans who are unable to resume making repayments can apply to their respective banks to make reduced instalment payments, pegged at 60 per cent of their monthly instalment. They have up to June to do so.

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That said, the DBS research team noted that continued and increased support for the vulnerable remains crucial, especially for those that have permanently lost their jobs and thus their main sources of mortgage finance in the form of cash and Central Provident Fund savings.

The team alsosuggested a "more stringent set of criteria" be used to grant deferment if such schemes are deployed in future crises, as they noted that some customers who have substantial emergency funds have, nonetheless, taken advantage of mortgage deferments for financially strategic reasons.

They identified three groups of mortgage applicants, including the "vulnerable", who have inadequate savings and consistently poor cashflow; the "strategic", who have substantial savings and are savvy in their financial planning; and "others", a group that comprises mixed characteristics, but tend to have positive cash flow or a few months of emergency funds.

While the "vulnerable", which make up 31 per cent of DBS's mortgage applicants, have tapped on the scheme arising from real financial need, such as loss of income or cash flow difficulties, the "strategic", which make up 17 per cent of mortgage applicants, may have been more savvy in tapping the scheme to free up cash for investments.

Notably, the number of customers that applied for deferments rose 8.5 per cent in December compared to June last year, driven primarily by an increase in the "vulnerable" and "strategic" groups.

The number of "vulnerable" applicants rose by 18.5 per cent in December, relative to June, a sign that a small pocket of customers continue to struggle financially. These may be customers who have seen larger magnitudes of income degradation, or are still unable to regain employment.

The number of "strategic" applicants rose by 30.7 per cent over the same period.

Noting that the government has rolled out relief extensions in 2021 on a more targeted basis, the research team wrote: "We welcome the targeted approach. Amidst an improving outlook, relief extensions should be reserved for individuals with more immediate financial need."

The team also called for a more stringent set of criteria, should the mortgage deferment scheme be deployed in future crises.