How the New Property Rules Affect Your Housing Loans?

[Dennis Ng]

Can you afford to purchase that dream home? Business Times 3 Apr 2011

This article is published in Business Times Annual Property Supplement. This is the 5th year that Dennis Ng has been invited to write the only article on Housing Loan in the Property Supplement.

DENNIS NG gives the lowdown on how the new rules affect the financing of your new property purchase

IF YOU have a housing loan or are planning to take one, how would the latest round of property cooling measures announced in January affect you?

Fret not, this article will help shed light on this and other matters related to financing a home.

Under the new measures, which took effect on Jan 14, if you have one or more outstanding housing loans at the time of your new property purchase, the maximum that you can borrow has been reduced from 70 per cent to 60 per cent of the property's value.

If you are staying in an HDB flat and thinking of upgrading, or moving from one location to another, you will be affected by the maximum 60 per cent financing cap on the property you are eyeing, as long as you have an existing housing loan.

The same applies to anyone living in a private property and planning to move. If you have an existing mortgage, the maximum loan you can take on your new property is 60 per cent.

Even if you are buying a property that is under construction and ready for occupation only a few years later, you will still be caught by this measure.

So you would need to come up with 40 per cent of the purchase price, of which a minimum 10 per cent has to be in cash.

But if you have sold your existing property and can show proof in the form of a sales and purchase agreement or an exercised option to purchase, you can apply for the maximum 80 per cent financing from financial institutions.

Bridging loans

Some of you might wonder if it is possible to apply for a bridging loan to make up the difference between the 80 per cent and 60 per cent financing.

The answer is no if you have not sold your existing property, as you can only apply for a bridging loan if you can show proof that you have sold your existing property.

A bridging loan is an interest-servicing short-term loan (up to six months), which helps tide over the period between the completion of purchase of a new property and receipt of proceeds from the sale of an existing property.

A minimum 5 per cent of the purchase price has to be paid by the buyer. In the case of 80 per cent financing, you can apply for a bridging loan for the remaining 15 per cent of the downpayment.

In the case of 60 per cent financing, you can apply for a bridging loan for the remaining 35 per cent of the downpayment.

The new measures also affect non-individuals who buy residential property, among them companies, trusts, collective investment schemes and so on. Here, the maximum financing allowed is 50 per cent of the value of the property.

What if you own an existing property which has been fully paid, and you now plan to buy a second residential property?

Will you be affected by the 60 per cent cap on financing?

The answer is no, because this rule only affects those with an existing housing loan.

If you own a home with no outstanding housing loan, you can apply for the maximum 80 per cent financing when buying your second residential property.

Interest rate outlook:

If you want to know the interest rate trend for housing loans, you should keep a close watch on the three-month Sibor (Singapore interbank offered rate). That's because banks use it as a gauge of interest rate trends.

So if the three-month Sibor continues to rise for a few consecutive months, there is a higher likelihood of banks reviewing interest rates, especially those charged on fixed rate home loan packages.

As at Feb 23, the three-month Sibor was about 0.43 per cent, the lowest level in Singapore's history. The swap offer rate, or SOR, was even lower, at about 0.11 per cent, also a fresh low.

Typically, for home loans pegged to Sibor and SOR, the actual interest rates banks charge include an interest margin of say, 0.8 per cent, on top of the Sibor or SOR rate.

So interest rates on such packages currently can be as low as one per cent, much lower than the inflation rate, which is now 4.6 per cent. Thus, interest rates are effectively negative when inflation is taken into consideration.

Before you rush to get a SOR-based loan, note that the swap offer rate is basically Sibor + US$ swap cost into Sing-dollar interest rates.

Thus, the SOR is also affected by the volatility of the exchange rate of the US dollar versus Sing dollar.

The SOR is more volatile than Sibor, sometimes higher and other times lower than Sibor. It just happens that in the last year or so, SOR has been lower than Sibor.

Historical low

Interest rates in Singapore are mainly affected by the US Federal Reserve rate and liquidity, or availability of funds in the local banking sector.

The US Federal Reserve has maintained interest rates at 0.25 per cent, which is a historical low. Over the next six to 12 months, the US is expected to continue to keep interest rates low to stimulate the still fragile recovery.

Liquidity in Singapore's banking sector is also expected to remain ample so pending unforeseen circumstances, interest rates on housing loans should remain low for the next six to 12 months.

However, should the US economy continue to strengthen into 2012, US interest rates may rise at some point.

As most housing loans span 10 to 30 years, it is prudent to use a higher interest rate - rather than the current low rates - when estimating monthly loan instalments.

During good times, home loan rates have gone up to 4 per cent or higher, so this is a prudent estimate.

To ensure that you don't over-borrow, you might also want to cap your housing loan instalment to no more than 35 per cent of your gross income.

Assuming maximum financing of 80 per cent, if you take a 25-year home loan with an interest rate of 4 per cent, the table 'Doing your sums' shows you the maximum loan and price of property you can comfortably afford.

From the table, you can see that if you want to buy a $1 million property, your household income should be at least $12,000 a month. Using this as a benchmark, should prices of mass market condos go up any further, they might be beyond the affordability of most people in Singapore.

Buying a property is a long-term commitment so to avoid any pitfalls, you might want to consult an independent mortgage consultant who can help you compare all the available loan packages offered by financial institutions here. There is typically no charge for this service as the consultants are paid a fee by banks separately.

Dennis Ng is an accountant by training and founded mortgage consultancy http://www.HousingLoanSG.com in Singapore in 2003

[NAX]

Dear Dennis or anyone here who can share your experience.

The flat which my husband and I own has an outstanding HDB loan of $90K and our combined CPF is sufficient to pay off this loan. The flat is 4 years old meaning we will fulfil the minimum occupation period (MOP) earliy 2013. In the near future, if the property market is affordable, we may have plans to buy private property.We are currently paying $3,000 per year to for interest plus insurance. We cannot make use of our CPF as it is below the our savings are below minimum sum requirement separately. Our kids are young at 3 and 6 years old so can't make use of our CPF to finance university fees. We are thinking of paying up the $90K now - appreciate your advice if this is wise! Alternatively, should we pay it off only when we want to buy a private property?

Thank you!

[Dennis Ng]

Dear Dennis or anyone here who can share your experience.

The flat which my husband and I own has an outstanding HDB loan of $90K and our combined CPF is sufficient to pay off this loan. The flat is 4 years old meaning we will fulfil the minimum occupation period (MOP) earliy 2013. In the near future, if the property market is affordable, we may have plans to buy private property.We are currently paying $3,000 per year to for interest plus insurance. We cannot make use of our CPF as it is below the our savings are below minimum sum requirement separately. Our kids are young at 3 and 6 years old so can't make use of our CPF to finance university fees. We are thinking of paying up the $90K now - appreciate your advice if this is wise! Alternatively, should we pay it off only when we want to buy a private property?

Thank you!

not sure why you want to pay off the loan now? I would personally only consider paying it off when I want to buy a private property...frankly by year 2013, probably government would remove the 60% financing rule for 2nd housing loan and revert back to 80% financing.

[NAX]

Dear Dennis,

Thanks for your quick reply, appreciated! The reason why we want to pay off the loan is we are paying $3000 per year for interest and insurance and we can't make use of our CPF monies to generate income.

[cheonghongyan]

Dear Dennis,

Thanks for your quick reply, appreciated! The reason why we want to pay off the loan is we are paying $3000 per year for interest and insurance and we can't make use of our CPF monies to generate income.

Hi NAX,

Just to share my experience.
Maybe you forgotten CPF actually also paying you 2.5% interest for your 90k which is about 2250, therefore you are not paying 3000 per year. If you wait for opportunity and do your homework, and use this 90k to invest, it is not difficult to beat the interest and insurance as housing load is the cheapest loan.

Regards,

[NAX]

Thanks, Hong Yan. You are totally right, I have not taken into account the interest the 90K brings.

Thanks to all for your time and kind advice, appreciated!

[spezlezz]

Hi NAX,

I think the quoted 90k is from your ordinary account. When calculating half of the minimum sum, you can added up your special account and ordinary account

See the following CPF FAQ :
http://ask-us.cpf.gov.sg/hybrid/Themes/ ... SourceId=0

[lootster]

Does anyone know, for a HDB flat under HDB loan, can we refinance using a bank loan?

If yes, is there any restriction to the loan amount? Eg, say HDB loan is already 50% paid, can we took up another bank loan of 80% of the flat valuation?

[desmondngo1125]

Hi looster

Yes you can re-finance your housing loan using a bank loan for the outstanding amount if you are on HDB loan now. But once you are on bank loan, you will not be able to go back to take up the HDB loan later. You will be "stuck" with bank loans and have to refinance using bank loan in the future.

As for the loan amount, my understanding is that if your outstanding loan amount is less than S$100k, banks usually will not be interested as they probably can't earn much from your loan application. The loan amount that you can borrow from the bank should be depending on your household income.

Lastly, the bank loan will be on the remaining outstanding housing loan, and not on the flat valuation.

I hope i remember all the above correctly. Please feel free to correct me if I am wrong.

[lootster]

Thanks for your prompt reply!

You have answer my doubt mainly on the highlighted point below. Which means bank will only loan up to the max. outstanding balance you have from the previous HDB loan. Am I right?

Hi looster

Yes you can re-finance your housing loan using a bank loan for the outstanding amount if you are on HDB loan now. But once you are on bank loan, you will not be able to go back to take up the HDB loan later. You will be "stuck" with bank loans and have to refinance using bank loan in the future.

As for the loan amount, my understanding is that if your outstanding loan amount is less than S$100k, banks usually will not be interested as they probably can't earn much from your loan application. The loan amount that you can borrow from the bank should be depending on your household income.

Lastly, the bank loan will be on the remaining outstanding housing loan, and not on the flat valuation.

I hope i remember all the above correctly. Please feel free to correct me if I am wrong.

[desmondngo1125]

Hi lootster

Yes, you are right. Bank will look at your outstanding housing loan and decide on the maximum loan they can extend to you based on the combined income of the loan applicant. The bank will look at the loan applicant with the higher income to based their decision.

Glad to be of help.

[candy_chia]

Below are figures showing what will be the variation to the monthly mortgage payment with respects to reduction in loan tenure after the cooling measure:

Monthly loan mortgage payments before 6 Oct 2012.png (23.02 KiB) Viewed 21635 times

Monthly loan mortgage payments AFTER 6 Oct 2012.png (24.65 KiB) Viewed 21635 times

Diagram of the latest cooling measure after 6 oct 2012:

6th cooling measure.png (91.7 KiB) Viewed 21635 times

Souce: Maybank Kim Eng Research