Deferred Payment on property, what to take note of?

[Dennis Ng]

This issue’s topic:”Deferred Payment for property purchase, what you should take note of”. I’ve been interviewed by TV program “Money WeeK” to comment on this issue to be broadcasted tomorrow 20 April 2007 at 9.30 pm on Channel U.

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Dennis Ng, http://www.HousingLoanSG.com – help you get BEST Deal in Housing Loans in Singapore & Australia!

Deferred Payment for Property Puchase, what to take note of?

The property market is getting hot and is filtering down to “mass market” property. The latest project Casa Mera next to Tanah Merah MRT attracted more than 2,000 people to view the showflat within first 2 days and more than 75% of total 556 units are snapped up in first 2 days!

This project attract mainly people who want to “buy to stay” rather than invest and many of them opt for “Progressive Payment” instead of “Deferred Payment”.

If you want to buy a property on Deferred Payment, what are the pros and cons of doing so and what do you need to take note of? Fret not, I’ll share with you all the answers in this e-newsletter.

Firstly, you need to know that typically property developer priced properties under Deferred Payment by about 1% to 5% higher than that for progressive payment. If the property cost S$1 million, that can work out to a difference of $50,000. Thus, you might want to consider is it worthwhile to pay more money for Deferred Payment scheme.

Under Deferred Payment scheme, typically you just pay 10% to 20% of the property price. The rest of the payment, 80% to 90% , is only payable upon property attaining TOP (Temporary Occupation Permit), which might be 2 to 3 years from now.

Thus, for newly married couples who might be tight on cashflows, opting for Deferred Payment does help in smoothening their cashflow as everything from wedding, to buying furniture etc all cost money and they might not have enough savings YET if they choose Progressive Payment for property purchase.

Actually, the most important consideration for a person buying a property is to make sure that he/she can afford the property comfortably. Even if you’re buying a property for speculation, you must also be prepared for the worst case scenario whereby you cannot sell the property before TOP and the rental income you receive might not be sufficient to pay for the monthly Housing Loan instalment.

Many people who bought a property on Deferred Payment might think that since there is no further payment for property till TOP, there is NO hurry to apply for a Housing Loan without knowing that NOT applying a Housing Loan NOW might subject them to risks later.

Risk 1: valuation of property upon TOP drops if the property market falls in future.

For instance, if you buy a property at S$1 million today and needs to take a 90% loan or S$900,000. However, you decide not to apply a loan first. If upon TOP of the property, the property value drops by 10%, to say $900,000, banks would only grant loan up to 90% of the NEW valuation of $900,000 or $810,000 ONLY. If you have problem coming up additional cash of S$90,000, then you might be in for nasty surprise. The property developer can sue you for any loss they suffer as a result of you unable to complete the purchase of the property.

Risk 2: Changes in your financial situation might lead to bank rejecting your loan application.

Things can change anytime. What if upon TOP of the property, you suffered a pay cut or you might lose your job eg. retrenched. If that happens, if you apply for a Housing Loan then, the bank might reject your loan application. Thus, you would end up not able to complete the purchase, losing all the money you put into the property so far and still liable for any losses the property developer suffers.

Please note that if you intend to use CPF to pay for eg. 5% or 15% of the property price (out of total initial payment of 10% or 20%), CPF Board requires you to have a Bank loan approved before CPF Board allows you to use CPF!

MAS expressed concern that some property developers who might have too much exposure to home buyers on Deferred Payment and if some of the buyers cannot complete the purchase, developers might be affected adversely. Actually, most of the developers in Singapore have strong financial position and such risk is actually not high currently.

Moneyweek also expressed concern that there might too much speculation in the property market currently. My personal opinion is that the current speculative activities is not yet bubblish if compared to 1996’s peak. Because only very few projects experienced “overnight queues”, while back in 1996, many projects had overnight queues. Furthermore, prices of many mid-tier and mass-market properties are still about 20% to 30% lower than 1996s peak.

At the end of the day, the most important thing is for one to assess their own financial situation to make sure they are not over-committing themselves when they buy a property. Make sure it is “Home Sweet Home”, not “Home Sweat Home”.

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