PREPAYMENT RISK FOR HDB MORTGAGES IN SINGAPORE
LEE NAI JIA
LEE NAI JIA
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Abstract
This study analyses prepayment of mortgages of Housing Development Board (HDB)
flats, in the light of liberalization of financial sector by Monetary Authority of
Singapore (MAS). This research is the first of its kind with regard to public mortgages,
as past literature deals with private mortgages only. This study is significant as HDB
mortgages are more likely to be securitised, compared to private mortgages. This is
because HDB is endowed with political, legal, financial advantages and a ready pool of
mortgages to undertake such an operation. By studying 594 public mortgages from 1982
to 2000, we found that the macroeconomic characteristics are more influential in the
decision to prepay compared to the borrower and loan specific characteristics.
Furthemore, prepayment is positively related to market sentiments, public rate at sale
and the ability to upgrade. Conversely, it is negatively related to income growth and
volatility of private mortgage rates. The duration analysis provides similar findings,
except that more borrower and loan specific variables are significant. The duration is
negatively related to the income level of household, premium paid, outstanding loan
relative to selling price while positively related to age of unit. Lastly, the study attempts
to extend the prepayment literature by looking at the effect of upward mobility, proxy
by the ability to upgrade, to prepayment. Such upward mobility cannot be explicitly
observed in U.S., where most literature is based. For this study, it looks at how the
upgrading from public to private housing will affect prepayment. The findings have
shown that the ability to upgrade is significant to prepayment and positively related to
prepayment risk and negatively related to loan duration.
Keywords
Prepayment risk, upward mobility, public mortgages
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Date
2001
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