Tag Archives: Mortgage

Home loans – what to look out for

Posted on 29 Apr 2011 | Comments Off on Home loans – what to look out for

How to shop for a housing loan under today’s interest rate, housing conditions?

How do you assess your package? How much should you borrow?

Following the property cooling measures in January, home buyers have become more cautious in their property search. However, buying interest has remained intact given the strong economic outlook, ample liquidity and low interest rates. With the rising cost of living, property remains an attractive option to buyers as a hedge against inflation.

Against the current backdrop, home-buyers should consider several factors before signing on the dotted line.

Regulatory Impact

Home buyers should first evaluate the impact of the new regulations on their financing options and costs. One implication is that financing available for a second property has dropped to 60 per cent of the property value. This means that home-buyers’ debt burden will rise given the higher cash outlay to be committed upfront.

HDB upgraders should be aware that financing granted is only up to 60 per cent for their new purchase, even if they are in the process of selling their existing flat. However, banks may still be able to offer a loan of up to 80 per cent if they can provide evidence of the sale of the existing home before the loan is disbursed.

Home owners should also be aware that they will have to pay a seller’s stamp duty if they sell their property within the first four years of purchasing their property. Although this stamp duty reduces in proportion over a period of four years, this has increased the cost for property owners looking to sell their property within a short period.

Hence, if the intention is to sell the property within four years, buyers should assess if they can achieve breakeven when the property is sold.

Affordability

There are many factors to consider in assessing the financing quantum property buyers should take. A key consideration is the stability of their income source and the availability of CPF savings to service the loan.

To ease their monthly cash flow, property buyers can consider setting aside some CPF in their ordinary account for monthly instalment servicing instead of using it all for lump sum payment.

The loan tenor is another important factor to consider. A longer tenor allows buyers to stretch their repayments and keep cash flow manageable, while a shorter tenor enables them to repay the loan faster and save on loan interest .

More importantly, buyers should take into account that future rate increases could drive up monthly instalments and result in financial hardship. For every 1-per-cent increase in interest rate, the monthly instalment will rise by about S$500 for a S$1 million loan stretched over 30 years.

Hence, home owners should set aside sufficient funds to meet rising interest rates and any unforeseen circumstances.

Ideally, they should have a holding power of at least two to three years and ensure that monthly loan repayments are not more than 35 per cent of the gross monthly household income.

If the property is for investment and rental income is used for loan servicing, they should also factor in possible drop in rental rates.

To ensure financial liquidity, it is prudent to maintain 18 to 24 months of monthly instalments per property in their bank account, to allow ample time to sell off the property in case of emergencies. Prompt repayment will also ensure a good credit record with the bureau and facilitate future borrowings.

Home buyers should take into account other miscellaneous costs incurred in owning a property. These include property taxes, MCST charges for condominiums and strata bungalows, and fire insurance premium.

Choice of Home Loan

Home buyers are unique in their risk appetite and income profile, and thus should take the time to select a home loan that best matches their needs. They should discuss their financing requirements with their preferred banker to customise a home loan package to meet their needs.

Home Loans Pegged to Singapore Interbank Offer Rate (SIBOR) /Swap Offer Rate (SOR)

While the current low SIBOR /SOR-pegged home loans allow home buyers to capitalise on lower interest rates, such loans are more volatile in nature. Borrowers’ monthly instalments will vary with the constant changes in cost of funds and would be first to be affected by higher repayments in a rising interest rate environment.

However, some home loan packages offer the option of constant monthly instalment (CMI) feature to mitigate these inconveniences. For example, UOB’s SOR home loan with CMI feature allows customers to fix their monthly instalments for up to three years, depending on the loan package selected. If interest rates move up, they can be assured that their monthly cashflow will not be disrupted.

If interest rates decline, more of the principal amount is paid off thus saving more on loan interest

Floating Board Rate Loans

Floating board-rate loans offer more stability as the mortgage rates do not vary with SIBOR/SOR. In addition, packages with no lock-in period gives home owners the flexibility to do partial repayments at no additional cost, without having to time the partial repayment at the SIBOR/SOR re-pricing date.

In a rising interest rate environment, such packages are advantageous over loans pegged to SIBOR/SOR as the impact on the cost of funds is not immediate.

Fixed Rate Loans

Fixed rate loans offer the most stability. However, such loans come with a premium and home owners could be tied to a higher fixed rate while cost of funds remains low. These loans are suitable for owner occupiers and those with a longer investment time horizon as partial repayments are generally restricted with penalty.

To enjoy the best of both worlds, home owners can split their loan into a fixed rate loan and a floating rate loan to hedge against any increase in interest rates and allow greater flexibility in repayment under the floating rate loan.

Other factors to consider in the choice of home loans include penalties for partial prepayment or redemptions and conditions for refund of legal fee and valuation fee subsidies granted during loan take-up.

As a form of protection, home buyers could also consider taking up a mortgage reducing term assurance which will pay off their housing loan and protect their loved ones from debt burden in the event of unfortunate circumstances.

By Chia Siew Cheng – head of the loans division at United Overseas Bank

Comments Off on Home loans – what to look out for

Posted in Loan / Mortgage / Finance

Tagged , , , , , , , , , , , , , , , , , , , ,

Residential price recovery has overstayed its welcome

Posted on 15 Apr 2011 | Comments Off on Residential price recovery has overstayed its welcome
The Singapore residential property market has had a very strong recovery since mid-2009 and prices are hitting record highs. However, the recovery has also prompted the Government to announce four rounds of residential property market cooling measures since September 2009.The harshest so far has been the latest round introduced in January, consisting of further hikes in the seller’s stamp duty and reductions in mortgage loan-to-value ratios.

The cooling measures have caused cracks in the market. Private residential sales volume and price gains have recently slowed and we see potential downside for prices in Singapore. Mass market private properties, which have led the current recovery, could fall 10 to 15 per cent this year, while prime properties could lose zero to 5 per cent. Our cautious outlook is predicated not only on the harsh cooling measures but also on a number of structural drivers of the current recovery that we believe could turn negative over the next one to two years.

Current recovery driven by a confluence of supportive factors

With little doubt, Singapore’s strong economic growth and record-low interest rates have been the two main drivers of the residential property market recovery. The stellar 14.5 per cent gross domestic product growth last year has resulted in strong employment conditions and higher salaries, which in turn boosted home demand. Meanwhile, record-low interest rates have helped keep mortgages affordable despite rising property prices.

Another driver for the recovery has been Singapore’s steady population growth. From 2000 to 2009, Singapore’s successful repositioning as a global city and its liberal immigration policy ushered the population to grow from 4 million to 5 million – an annual growth rate of 2.4 per cent.

Amid this steady increase, the supply of residential property units actually plummeted. In 2000, about 37,000 homes were completed, of which some 28,000 were Housing and Development Board (HDB) flats, and 9,000 were private residential units. However, the total number of completed units fell to a low of around 9,000 in 2006 (HDB 3,000; private residential 6,000), and a still-paltry 17,000 in 2009 (HDB 7,000; private residential 10,000).

The culprit, in our view, was the HDB’s adoption of the Build-to-Order scheme in 2001, which significantly slowed down the HDB flat construction process.

Supportive factors expected to wane

We believe these market supportive factors will wane. Singapore’s economic growth is expected to slow down to between 4 and 6 per cent this year as export growth tapers off, and employment and income growth, though healthy, may not be as strong as last year.

And while interest rates could remain depressed, they will not stay low forever. In recent speeches, United States Federal Reserve officials have reignited market concerns about the end of quantitative easing and the eventual tightening of monetary policy.

Given that Singapore interest rates tend to follow US interest rates, the day of reckoning for mortgages in Singapore may not be far away. UBS expects the Fed to start hiking rates in the first quarter of next year, which means Singapore interest rates could also rise early next year.

The Government has also tightened some of its permanent residence policies, resulting in a drop in the annual population growth rate to 1.7 per cent last year. Foreign worker levies will also be raised further as announced in this year’s Budget. All this would mean that population and housing demand growth should slow.

In addition, the HDB has been very active in launching new supply of public flats over the past year and this should result in a significant increase in completed HDB flats by late 2012 or early 2013. We estimate that 16,000 HDB flats would be completed in 2013.

In the private residential property market, the Urban Redevelopment Authority has been actively launching new sites, especially mass market ones in suburban areas, through both its confirmed and reserve lists. This should help address the residential property supply shortage that has built up in recent years.

For these reasons, we expect Singapore residential prices to decline. For potential home-buyers, this means a potential price relief. For investors, better returns could be achieved this year from office and industrial property exposure, where rentals have continued to rise recently driven by healthy occupier demand.

Tan Chin Keong is an analyst at UBS Wealth Management Research.

The URA has been actively launching new sites in the private residential property market to help address the supply shortage.

Source : Today – 15 Apr 2011

Comments Off on Residential price recovery has overstayed its welcome

Posted in Property Market / Real Estate

Tagged , , , , , , , ,