Published 23 April 2011
By Chia Siew Cheng
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.
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.
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.
Chia Siew Cheng is head of the loans division at United Overseas Bank.