Leasehold or Freehold property?

[Dennis Ng]

Someone asked the question at another forum. Below is extracting the question and my answer for everyone's easy reference:

Quote:
Leashold or Freehold?

At first I thought FH property should be ok, but am not so sure now, perhaps I might have missed out something, see eg. below:

A friend bought a FH condo (East) 5 yrs back at $750k, now can only fetch $650k. A relative bought a 99-yr inter-terrace (Central) 10 yrs back at $1.2mil, now fetch only $750k.


My comments:
the above ONLY shows that if you buy a property at the "wrong" price (ie. too high a price), you would lose money whether it is Freehold or leasehold.

Typically, a Freehold property can retain its value better (ie. assuming you did not over-pay) than leasehold property.

Recently, someone approached us where their leasehold property has 43 years lease left, the bank is asking them to pay some lump sum cash because their loan amount is higher than the market valuation.

I like to alert the public that leasehold properties 60 years or below typically the value drop quite drastically compared to property with longer lease.

It also shows that when we purchase a property, you might not want to "over-borrow" (ie. borrow eg. 90% of purchase price/valuation), any drop in the market valuation, and if you cannot service the instalment, then you cannot even sell the property due to "negative-equity" (loan outstanding more than valuation).

Coming to your question:
In my opinion, the proper steps should be:
1. determine the objective of buying (upgrading) your house. What is your objective exactly? (for investment or for self-occupation).

For self-occupation, why buy another house, what's wrong or inadequate about your current house?

For instance, I have been staying in a HDB 5-room flat for the last 11 years and see no reason to "upgrade" at all. You can have a different decision, the key is to be very sure the "why" (objective) of what you plan to do.

Begin with the end in mind.

2. after you determine your objective, next step is to list out the alternatives (eg. apartment, condo, landed house) that meet your objective.

3. compare the alternatives to your own financial situation. You should NOT over-stretch. It's supposed to be "Home Sweet Home" (not Home "Sweat" Home) - this is something I always cover in my public Financial Planning talks.

4. make a final decision on the house you wan to buy. However, before placing any "option" money, I would suggest that you get "prior" bank approval first. The last thing you want is to place a 1% deposit and had to forfeit the 1% deposit when bank reject your loan. (such risks I have highlighted in a recent article in Sunday Times on 30 July 2006 entitled "Don't be a home loan reject".

http://www.HousingLoanSG.com can help consumers get prior bank approval FREE. (We don't charge for our service at all).

Finally, here's wishing you and other forumers out there:"Happy House Hunting".