The Internet has been buzzing lately with news that Facebook founder Mark Zuckerberg acquired a loan to refinance his US home, with many wondering why a billionaire such as himself would take out a loan when he can buy the property outright.
Interestingly, the practice is not uncommon, even in Singapore where many wealthy home buyers are taking advantage of the low interest rate environment to acquire loans.
According to Desmond Chua, Head of LoanGuru, rich consumers usually pay a down payment of 30 to 40 percent of the property’s purchase price before taking up a loan.
“Assuming a purchase price of S$1 million, they will pay down 40 percent and take up a 60 percent loan. The monthly instalment over 20 years is S$2,854 per month,” he added, which is a small amount for any millionaire or billionaire.
Meanwhile, the interest portion to the bank would be S$647 while principal portion is S$2,207. Assuming the unit was rented out at a market rate of S$3,000 monthly, the rental yield would be 3.6 percent.
Chua said that by paying a down payment of S$400,000 and renting out the property, a wealthy buyer would “have someone to pay the bank S$647 per month to service the loan and reduce the principal of the loan on a monthly basis while they wait for the capital appreciation of the property”.
“With the remaining S$600,000 saved from taking up a mortgage loan, they can duplicate the same formula and buy one or more properties,” added Chua.
He noted that banks assess home loans using three methods – namely the Debt Servicing Ratio, Asset Based Lending and Asset Under Management Assessment.
Provided wealthy borrowers have strong credit standing, positive income and no outstanding litigation, they have a good chance of getting their loans approved.
“Usually, any middle-income earner can fit into the first or first two assessment methods. The third credit assessment method refers to individuals with positive financial cash flow. So if a rich consumer meets the third assessment criteria, then getting a loan is simply a breeze,” Chua said.
Not taking into consideration HDB policies and the government’s cooling measures, supposing a wealthy applicant chooses a HDB loan, Chua sees no reason for banks to reject the loan, considering their financial standing is “enough to purchase a few condominiums”.
Source : PropertyGuru – 2012 Jul 19