Chart of the Day: Debt servicing costs to outpace income growth as interest rates rise

Disposable income will deteriorate.

Mortgage servicing costs are expected to outpace household income growth once interest rates rise, according to a report by BNP Paribas.

The report noted that households face further deterioration in disposable income as Singaporean interest costs are expected to rise in tandem with Fed tightening.

BNP Paribas noted that Q1’s sharp rise in interbank interest rates provided a dry-run of this impact, with debt service costs rising by an estimated SGD300 per month.

“This matters for new mortgages by inherently pushing up total household debt service costs. Moreover, due to initially low interest rates, the pace of increase in interest servicing will likely exceed that of income growth, pushing up debt service ratios. In turn, fewer households are likely to meet the MAS’s TDSR requirements. Consequently, the persistence of this measure, while positive for financial system stability, is a key constraint to the revival of property demand in Singapore and, by extension, the outlook for prices,” said the report.