Housing loans demystified

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#1
Business Times - 23 Sep 2010

Housing loans demystified


DENNIS NG explains what the latest changes in property financing are and what they mean to you

WHAT is the outlook for interest rates? How will the latest changes in property financing affect you? Fret not, this article will help guide you in the right direction.

From Aug 30, 2010, regardless of whether you're a Singaporean, permanent resident or foreigner, if you have an existing housing loan on a property - whether the property is in Singapore or overseas - the maximum financing you can get for your property purchase has been revised downwards to 70 per cent from 80 per cent previously.

And also from Aug 30, 2010, if you have an existing housing loan, and if you want to purchase another property, the minimum cash downpayment has been revised to 10 per cent from 5 per cent previously.

Thus, if you have an existing housing loan and are thinking of buying a property, it is time to re-work your numbers. And you might need to put off the decision to buy a property for the time being if you do not have the required minimum 30 per cent downpayment for the property, as the maximum financing has been reduced to 70 per cent.

However, if you have an existing property that is fully paid, and have no outstanding housing loan, and if you buy a property, you can still get up to 80 per cent financing. The above measures on the cash downpayment and 70 per cent financing limit apply to all property purchases with date of option to purchase dated Aug 30 or later.

How does it affect upgraders and people in the process of selling their property?

The government's main intention of introducing this new measure is to deter speculation in property. However, it can affect upgraders and people in the process of selling their existing property.

For instance, if you have an existing property which has an outstanding housing loan, but want to buy a new condominium project to be completed in a few years' time, you can only get maximum 70 per cent financing.

Those with plans to move are affected as well. If you plan to move to a new home and you purchase the new home before you sell your existing home, and if there is an outstanding loan on your existing home, you can only get a maximum of 70 per cent financing for your new home.

For those who have sold their property but the transaction is not completed yet, they might be affected as well.

In order to qualify for 80 per cent financing, homebuyers must prove the sale of their existing home to get the 80 per cent loan. For HDB flats, this requires an approval letter from HDB to the seller within two weeks from the date of the first sales appointment, which typically is about one to two months after the date of option to purchase.

For private properties, a signed sales and purchase agreement is required as proof, and a certificate from Iras showing that the stamp duty has been paid by the buyer of the existing home.

Types of housing loan packages available

With the recent entry of new players into the market, such as ANZ Bank and CIMB Bank, there are currently altogether 16 financial institutions that are active in providing housing loans in Singapore.

Each financial institution offers five to 10 different home loan packages. Thus, at any point in time, there are easily over 120 different housing loan packages available for you to choose from.

Housing loan packages with interest rates pegged to Sibor and SOR were only introduced since 2007.

Over the last three years, as interest rates remain low, and with more consumers aware of the availability of such packages, there seems to be a trend of more people choosing a housing loan package pegged to Sibor or SOR instead of floating rate packages, with interest rates pegged to bank board rates.

The reason for this is Sibor and SOR are transparent and are average market interest rates and are not subject to unilateral changes by individual banks, but each bank has its own discretion in determining the board rates.

Which is the best housing loan package?

Because of competition, banks change their housing loan packages very often. Furthermore, other than interest rates, banks vary their other terms and conditions, such as the penalty period, which varies from zero penalty period to three years' penalty period; penalty fees, which might vary from one per cent to 1.5 per cent; flexibility in making partial repayment within the penalty period; number of years of free fire insurance provided; amount of legal subsidy provided; etc.

A common misconception is that consumers might think there is such a thing as a best housing loan package.

The fact is, different home loan packages are suitable for people with different needs and priorities. Thus, there is no one-size-fits-all solution. You need to choose a housing loan package that is most suitable for you.

In this aspect, instead of trying to check with different banks on the different home loan packages available, which can be very confusing to consumers, a better choice might be to talk to an independent mortgage consultancy, who will, based on your needs and priorities, help you shortlist a few of the housing loan packages that are most suitable for you.

This service is provided free to you as a consumer, as the mortgage brokers are separately paid a fee by the banks for the service they provide.

Outlook for interest rates

Sibor (Singapore Interbank Offered Rate), the average interest rate banks borrow/lend money to one another, is used as a guideline by banks in setting interest rates on housing loans.

Currently, Sibor is at its lowest level. The three-month Sibor (as at Sept 3) was 0.543 per cent while the SOR (Swap Offer Rate) was at 0.308 per cent. SOR is basically Sibor + US$ swap cost into S$ rates, it involves swapping US$ into S$. Thus SOR is also affected by the volatility of the exchange rate of US$ versus S$.

In turn, Sibor is affected by mainly two factors. Namely, the US Fed interest rates and the liquidity of the Singapore banking sector.

Given that the US economy remains weak, it is likely that the US will continue to keep interest rates low for the next six to 12 months. And given the ample liquidity in Singapore's banking sector, it is likely that Sibor, and thus housing loan interest rates, will remain low in the next six to 12 months as well.

Outlook for housing loans market

This year saw the entry of two new players to the housing loan market, namely CIMB and ANZ Bank, which makes the already competitive housing loan industry even more competitive.

This is indeed good news to consumers as competition typically results in better and more competitive home loan offers from banks.

The writer is an accountant by training with 17 years of bank lending experience. In 2003, he set up www.HousingLoanSG.com, an independent mortgage consultancy portal
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
Reply
#1
Business Times - 23 Sep 2010

Housing loans demystified


DENNIS NG explains what the latest changes in property financing are and what they mean to you

WHAT is the outlook for interest rates? How will the latest changes in property financing affect you? Fret not, this article will help guide you in the right direction.

From Aug 30, 2010, regardless of whether you're a Singaporean, permanent resident or foreigner, if you have an existing housing loan on a property - whether the property is in Singapore or overseas - the maximum financing you can get for your property purchase has been revised downwards to 70 per cent from 80 per cent previously.

And also from Aug 30, 2010, if you have an existing housing loan, and if you want to purchase another property, the minimum cash downpayment has been revised to 10 per cent from 5 per cent previously.

Thus, if you have an existing housing loan and are thinking of buying a property, it is time to re-work your numbers. And you might need to put off the decision to buy a property for the time being if you do not have the required minimum 30 per cent downpayment for the property, as the maximum financing has been reduced to 70 per cent.

However, if you have an existing property that is fully paid, and have no outstanding housing loan, and if you buy a property, you can still get up to 80 per cent financing. The above measures on the cash downpayment and 70 per cent financing limit apply to all property purchases with date of option to purchase dated Aug 30 or later.

How does it affect upgraders and people in the process of selling their property?

The government's main intention of introducing this new measure is to deter speculation in property. However, it can affect upgraders and people in the process of selling their existing property.

For instance, if you have an existing property which has an outstanding housing loan, but want to buy a new condominium project to be completed in a few years' time, you can only get maximum 70 per cent financing.

Those with plans to move are affected as well. If you plan to move to a new home and you purchase the new home before you sell your existing home, and if there is an outstanding loan on your existing home, you can only get a maximum of 70 per cent financing for your new home.

For those who have sold their property but the transaction is not completed yet, they might be affected as well.

In order to qualify for 80 per cent financing, homebuyers must prove the sale of their existing home to get the 80 per cent loan. For HDB flats, this requires an approval letter from HDB to the seller within two weeks from the date of the first sales appointment, which typically is about one to two months after the date of option to purchase.

For private properties, a signed sales and purchase agreement is required as proof, and a certificate from Iras showing that the stamp duty has been paid by the buyer of the existing home.

Types of housing loan packages available

With the recent entry of new players into the market, such as ANZ Bank and CIMB Bank, there are currently altogether 16 financial institutions that are active in providing housing loans in Singapore.

Each financial institution offers five to 10 different home loan packages. Thus, at any point in time, there are easily over 120 different housing loan packages available for you to choose from.

Housing loan packages with interest rates pegged to Sibor and SOR were only introduced since 2007.

Over the last three years, as interest rates remain low, and with more consumers aware of the availability of such packages, there seems to be a trend of more people choosing a housing loan package pegged to Sibor or SOR instead of floating rate packages, with interest rates pegged to bank board rates.

The reason for this is Sibor and SOR are transparent and are average market interest rates and are not subject to unilateral changes by individual banks, but each bank has its own discretion in determining the board rates.

Which is the best housing loan package?

Because of competition, banks change their housing loan packages very often. Furthermore, other than interest rates, banks vary their other terms and conditions, such as the penalty period, which varies from zero penalty period to three years' penalty period; penalty fees, which might vary from one per cent to 1.5 per cent; flexibility in making partial repayment within the penalty period; number of years of free fire insurance provided; amount of legal subsidy provided; etc.

A common misconception is that consumers might think there is such a thing as a best housing loan package.

The fact is, different home loan packages are suitable for people with different needs and priorities. Thus, there is no one-size-fits-all solution. You need to choose a housing loan package that is most suitable for you.

In this aspect, instead of trying to check with different banks on the different home loan packages available, which can be very confusing to consumers, a better choice might be to talk to an independent mortgage consultancy, who will, based on your needs and priorities, help you shortlist a few of the housing loan packages that are most suitable for you.

This service is provided free to you as a consumer, as the mortgage brokers are separately paid a fee by the banks for the service they provide.

Outlook for interest rates

Sibor (Singapore Interbank Offered Rate), the average interest rate banks borrow/lend money to one another, is used as a guideline by banks in setting interest rates on housing loans.

Currently, Sibor is at its lowest level. The three-month Sibor (as at Sept 3) was 0.543 per cent while the SOR (Swap Offer Rate) was at 0.308 per cent. SOR is basically Sibor + US$ swap cost into S$ rates, it involves swapping US$ into S$. Thus SOR is also affected by the volatility of the exchange rate of US$ versus S$.

In turn, Sibor is affected by mainly two factors. Namely, the US Fed interest rates and the liquidity of the Singapore banking sector.

Given that the US economy remains weak, it is likely that the US will continue to keep interest rates low for the next six to 12 months. And given the ample liquidity in Singapore's banking sector, it is likely that Sibor, and thus housing loan interest rates, will remain low in the next six to 12 months as well.

Outlook for housing loans market

This year saw the entry of two new players to the housing loan market, namely CIMB and ANZ Bank, which makes the already competitive housing loan industry even more competitive.

This is indeed good news to consumers as competition typically results in better and more competitive home loan offers from banks.

The writer is an accountant by training with 17 years of bank lending experience. In 2003, he set up www.HousingLoanSG.com, an independent mortgage consultancy portal
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
Reply
#2
http://sg.yfittopostblog.com/2010/09/28/...-mortgage/

Top five tips on choosing the right mortgage

By Mr. Propwise (courtesy of PropertyGuru)

Choosing a mortgage can be confusing.

There are so many options to think about: fixed or floating interest rates, loan term, lock-in periods, subsidies, penalties and other special features. There isn't one "best" mortgage out there, it all depends on your needs and preferences.

Here are the main options you need to consider when making your decision:

1) Loan amount

The local banks usually give a loan of up to 80 percent of the property value for first time homebuyers, but the actual amount will depend on their assessment of your ability to repay the loan. They typically look at a debt servicing ratio of 35 percent - 50 percent as a ceiling.

To calculate this ratio, they sum up your long-term liabilities (including the potential mortgage payment) and divide that by your monthly income. You can check out the affordability and mortgage payment calculators at LoanGuru to estimate the maximum amount that you can borrow and your potential monthly payment.

Also note that the bank will only lend you up to 80 percent of the LOWER of your purchase price or their own internal valuation. So if your purchase price is above their valuation, you will have to top up the difference in cash.

As a best practice, you should always get an indicative valuation and in-principle approval from a bank before you commit to a purchase.

2) Loan term

The loan term is the duration of time that you take to completely repay the loan. Loan terms usually range from 10 to 35 years. The longer your loan term, the smaller the monthly repayment you need to make, but the higher the total amount of interest you will eventually pay.

Also note that your age may be a limiting factor, banks will typically cap the maximum term up to the age of 65. So if you're 50 years old, you may only be given a loan term of up to 15 years. Young buyers looking to maximise the amount they can borrow will usually select a 35 year loan term.

3) Fixed or floating rate

Fixed rates offer the borrower security and stability as the rate does not change over a certain period. As interest rates are currently very low, if they rise, you will be protected from upward adjustments of your monthly mortgage payment. But this comes at a price, fixed rate packages usually charge higher interest than floating rate packages.

Borrowers who believe that interest rates will fall or remain low for a long period of time can go for floating rate packages as they can get lower interest rates up front and their monthly payments will fall if interest rates fall.

For floating or variable rate packages, they are typically linked to either of the two major benchmark rates: Sibor and the Swap Offer Rate (SOR).

These rates are mainly affected by US interest rates and Singapore banking system liquidity. But do not assume that they will always stay at the lows they currently are at (e.g. the SIBOR is around 0.5 percent now) , in 2007 they were as high as 3.6 percent!

As a rule of thumb, you should look at your monthly payments using rates of 4 percent to make sure you can still service your mortgage in case rates spike up.

4) Other special features

Some loans have an interest offset feature, where deposits at the bank can be used to offset the loan amount so you only pay the interest on the difference. For borrowers with large amounts of cash that they want to keep available for other uses at a moment's notice (e.g. investing in the stock market) this could be a good option.

Some banks also offer interest-only packages, usually on a case-by-case basis. For these loans, you only pay the interest amount for a specified period of time, and after that the loan will revert to a normal interest plus principle loan. This option may be suitable for investors who want to minimise the cash outflow during the interest only period.

5) Subsidies, lock-in period and penalties

Most loans come with some subsidies including the legal, valuation and fire insurance fees. When comparing mortgages, borrowers should check what the various fee subsidy amounts are. For example, there is usually a cap of $2,000 - $2,500 on the legal fee, and if your legal fees exceed those, you will have to top up the difference.

The lock-in period you should choose depends on your expectation of when you will sell the property and also on your view of where interest rates are going.

Typically the shorter the lock-in period, the higher the interest rate. But if you repay the mortgage within the lock-in period, you typically have to pay a penalty of anywhere from 0.75 percent to 1.5 percent, which is substantial.

Some banks can waive the penalty if you are selling your house (as opposed to just repaying the mortgage), so make sure you check if they will include this clause.

If you feel overwhelmed by all the different options above, you can also consider engaging the services of a mortgage broker, who will help to filter the right packages for you based on your requirements.

You should not have to pay them any fee as they will get a commission from the bank if they can successfully arrange a loan for you.

Happy mortgage shopping!

Mr. Propwise is the founder of Singapore property blog www.propwise.sg, which aims to help people make better real estate buying, selling, renting and investing decisions.


Invest for Dividends:
-
My Passive Income Investing Blog
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#2
http://sg.yfittopostblog.com/2010/09/28/...-mortgage/

Top five tips on choosing the right mortgage

By Mr. Propwise (courtesy of PropertyGuru)

Choosing a mortgage can be confusing.

There are so many options to think about: fixed or floating interest rates, loan term, lock-in periods, subsidies, penalties and other special features. There isn't one "best" mortgage out there, it all depends on your needs and preferences.

Here are the main options you need to consider when making your decision:

1) Loan amount

The local banks usually give a loan of up to 80 percent of the property value for first time homebuyers, but the actual amount will depend on their assessment of your ability to repay the loan. They typically look at a debt servicing ratio of 35 percent - 50 percent as a ceiling.

To calculate this ratio, they sum up your long-term liabilities (including the potential mortgage payment) and divide that by your monthly income. You can check out the affordability and mortgage payment calculators at LoanGuru to estimate the maximum amount that you can borrow and your potential monthly payment.

Also note that the bank will only lend you up to 80 percent of the LOWER of your purchase price or their own internal valuation. So if your purchase price is above their valuation, you will have to top up the difference in cash.

As a best practice, you should always get an indicative valuation and in-principle approval from a bank before you commit to a purchase.

2) Loan term

The loan term is the duration of time that you take to completely repay the loan. Loan terms usually range from 10 to 35 years. The longer your loan term, the smaller the monthly repayment you need to make, but the higher the total amount of interest you will eventually pay.

Also note that your age may be a limiting factor, banks will typically cap the maximum term up to the age of 65. So if you're 50 years old, you may only be given a loan term of up to 15 years. Young buyers looking to maximise the amount they can borrow will usually select a 35 year loan term.

3) Fixed or floating rate

Fixed rates offer the borrower security and stability as the rate does not change over a certain period. As interest rates are currently very low, if they rise, you will be protected from upward adjustments of your monthly mortgage payment. But this comes at a price, fixed rate packages usually charge higher interest than floating rate packages.

Borrowers who believe that interest rates will fall or remain low for a long period of time can go for floating rate packages as they can get lower interest rates up front and their monthly payments will fall if interest rates fall.

For floating or variable rate packages, they are typically linked to either of the two major benchmark rates: Sibor and the Swap Offer Rate (SOR).

These rates are mainly affected by US interest rates and Singapore banking system liquidity. But do not assume that they will always stay at the lows they currently are at (e.g. the SIBOR is around 0.5 percent now) , in 2007 they were as high as 3.6 percent!

As a rule of thumb, you should look at your monthly payments using rates of 4 percent to make sure you can still service your mortgage in case rates spike up.

4) Other special features

Some loans have an interest offset feature, where deposits at the bank can be used to offset the loan amount so you only pay the interest on the difference. For borrowers with large amounts of cash that they want to keep available for other uses at a moment's notice (e.g. investing in the stock market) this could be a good option.

Some banks also offer interest-only packages, usually on a case-by-case basis. For these loans, you only pay the interest amount for a specified period of time, and after that the loan will revert to a normal interest plus principle loan. This option may be suitable for investors who want to minimise the cash outflow during the interest only period.

5) Subsidies, lock-in period and penalties

Most loans come with some subsidies including the legal, valuation and fire insurance fees. When comparing mortgages, borrowers should check what the various fee subsidy amounts are. For example, there is usually a cap of $2,000 - $2,500 on the legal fee, and if your legal fees exceed those, you will have to top up the difference.

The lock-in period you should choose depends on your expectation of when you will sell the property and also on your view of where interest rates are going.

Typically the shorter the lock-in period, the higher the interest rate. But if you repay the mortgage within the lock-in period, you typically have to pay a penalty of anywhere from 0.75 percent to 1.5 percent, which is substantial.

Some banks can waive the penalty if you are selling your house (as opposed to just repaying the mortgage), so make sure you check if they will include this clause.

If you feel overwhelmed by all the different options above, you can also consider engaging the services of a mortgage broker, who will help to filter the right packages for you based on your requirements.

You should not have to pay them any fee as they will get a commission from the bank if they can successfully arrange a loan for you.

Happy mortgage shopping!

Mr. Propwise is the founder of Singapore property blog www.propwise.sg, which aims to help people make better real estate buying, selling, renting and investing decisions.


Invest for Dividends:
-
My Passive Income Investing Blog
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