Aug 24, 2008
Finding the best way to pay off a home loan
Choosing a suitable home loan package can be daunting with the myriad of choices available to a home owner. Invest looks at the current refinancing trend and highlights two new loan packages
By Lorna Tan
When the going gets tough, the tough go shopping. And that is what home owners have been doing - shopping for suitable and the lowest home loan rates.
The cheap cost of borrowing, a result of interest rates heading south, has led to more home owners opting to refinance their mortgages to enjoy savings.
Fuelling this trend are financial institutions which are jumping on the bandwagon to launch attractive and creative loan packages to capture a bigger slice of the lucrative mortgage market.
Refinancing your home loans
Let's take a look at the refinancing trend so far this year. Mortgage consultancy portal www.HousingLoanSG.com has seen a surge of at least 50 per cent in refinancing activities.
At HSBC, the volume of refinancing applications has grown more than 50 per cent in the last three months.
'The reason for this trend is the big drop in the Singapore Interbank Offered Rate
(Sibor) in the last 18 months from as high as 3.5 per cent to about 1.2 per cent currently,' said Mr Dennis Ng, spokesman for www.HousingLoanSG.com.
Sibor is the benchmark rate used by banks to determine mortgage rates for home loans. It is the cost at which banks borrow funds from one another.
The drop in Sibor means that those who took up a housing loan one to two years ago are likely to enjoy significant interest savings if they refinance now.
Mr Ng worked out that refinancing an outstanding loan amount of $480,000 to a lower interest rate of 1.95 per cent, down from the current rate of 3.5 per cent, will result in interest savings of $21,710 over three years. This assumes a 25-year loan tenure.
Even those who are subject to lock-in and clawback penalties may save money by refinancing, said Ms Annie Lim, managing director of mortgage consultancy Global Creatif Financial.
Furthermore, financial institutions which are eager for your business may offer to pay your legal fees of up to $2,000 for you to switch banks.
Refinancing has represented 75 per cent of all mortgages at Global Creatif Financial so far this year.
Still, Ms Helen Neo, Maybank Singapore's head of consumer banking, cautions that refinancing should be considered only when there are no plans to sell the property in the short term so as to avoid paperwork and potential costs.
Pegged rates versus fixed rates
With Sibor falling steadily, it is not surprising that many customers are opting for new Sibor-linked packages or refinancing from a fixed-rate package to a Sibor one.
Still, some customers are confused when faced with a choice of a three-month or a 12-month Sibor-pegged home loan package.
Mr Ng noted that if one chooses the latter, it is as good as fixing the interest rate for a year.
This means the customer enjoys greater certainty or lower volatility with a 12-month Sibor package than a three-month package.
However, as the 12-month Sibor rate is typically 0.5 per cent higher than the three-month Sibor, he will end up paying a higher interest.
Ms Lim believes that the three-month Sibor will appeal to those who are comfortable with the current interest-rate environment and who expect rates to stay depressed.
Looking ahead, Mr Bryan Ong of mortgage consultancy bcgroup.com.sg thinks that rates will remain flat for the next 18 months. That is why he feels that the three-month Sibor is 'the way to go'.
New home loan packages
With depressed interest rates and an influx of new and creative home loan packages, home owners are spoilt for choice.
However, opting for the cheapest rates may not always be the best for every home owner, as different people have different needs.
· MortgageOne Sibor
For instance, Standard Chartered Bank's (Stanchart) newly launched MortgageOne Sibor will appeal to those with excess cash.
This is because it comes with an offset feature so that customers can use the interest earned on their deposits to reduce the interest payable on their home loans.
MortgageOne Sibor loans are priced at 0.8 per cent per annum above the three-month Sibor for the first three years.
Customers can enjoy the same interest rate as their mortgage loan on two-thirds of the deposits linked to their loans, subject to a maximum of their outstanding loan amount. The remaining deposits will enjoy an annual rate of 0.5 per cent.
At the same time, they have the flexibility to withdraw their deposits at any time.
'This is good for home owners who have surplus cash. They could be waiting for investment opportunities and want to remain liquid. In the meantime, they can use their cash to reduce their loans,' said Mr Ong.
Interest-only loans
Some mortgage packages like the DBS Bank's new interest-only mortgage product launched early this month appear attractive, but experts cautioned that they are not suitable for everyone.
The product allows customers to pay only the interest for the entire duration of their home loan.
The principal amount is payable in one lump sum only at the end of the loan tenure.
This means that the money that would otherwise have formed the principal component of the loan instalments would be available to the customer for investing.
Ms Lim worked out that based on a rate of 3 per cent, a $1 million loan with a 25-year tenure would have a monthly instalment of $4,486.
Of this, $2,083 is paid towards the principal and would thus be available to the customer to meet other needs if he opts for interest-only servicing.
But here's the potential pitfall. If the customer invests wrongly or, worse still, has no discipline to save and invest, the amount would be frittered away and he still has a loan to pay.
Ms Lim said that she would go for an interest-only loan only under the following situations:
· If she has an intention to buy multiple properties and would like to pay only the loan interest and keep every cent possible;
· If she has other alternatives to invest at higher returns; or
· If her cashflow is very tight.
Like her, most experts said that they would prefer the conventional packages where both principal and interest are paid up regularly and doing so helps them pay their home loans in a disciplined manner.
Said Mr Ng: 'The customer might end up in financial trouble in the event that property prices correct by say over 20 per cent and plunge him into negative equity.
'In such a situation, he might not be able to sell his property at a price where he can pay up the loan.'
He cautioned home owners who opt for such a product that they would end up paying more interest in the long run compared to conventional loan packages where both the interest and principal components are paid up regularly.
However, Mr Ng added that he might consider such a loan package if he is buying an investment property.
DBS' interest-only mortgage charges 1.5 per cent on top of either the three-month or 12-month Sibor.
Other banks like Stanchart allow customers to pay only interest on a mortgage for up to three years and such products are offered on a case-by-case basis.
To ensure that customers are not overstretched, DBS imposes certain restrictions such as allowing home owners to borrow only up to 70 per cent of the property purchase price.
Finally, Stanchart's general manager of lending, Mr Dennis Khoo, advises home owners to consider the following when choosing a mortgage package:
· Is the property for your own stay or for investment?
· What are your long-term financial goals?
· Do you prefer security and protection or transparency with some volatility?
· Do you have any spare cash that you can use to reduce your interest payments and shorten your loan tenure?
Showing posts with label Property Buying Tips. Show all posts
Showing posts with label Property Buying Tips. Show all posts
Sunday, August 24, 2008
Monday, August 11, 2008
Found your dream home?
Found your dream home?
Make sure it doesn't turn into a nightmare. So, what should you do before saying 'I do' to one of the biggest financial commitments of your life?
Sun, Aug 10, 2008
The New Paper
By Suze Orman
FOR most people, the decision to buy a home hits like love at first sight: After endless rounds of dating, you finally find that special one.
You walk in the front door and swoon over the refinished hardwood floors.
Your eyes lock on the high ceilings.
Your heart pounds at the fabulous kitchen and the huge yard.
While I totally understand leading with your heart, use your head too.
Before saying 'I do' to one of the biggest financial commitments of your life, you need to follow up with a few repeat visits checking out every nook and cranny for big-ticket problems.
If you're buying directly from the developer, please don't get snookered into believing new means perfect.
Every single house or apartment needs a thorough inspection.
HERE'S A CHECKLIST
- Cast your eye high and low, to and fro, to spot cracks or leaks outside your 'normal' field of vision.
- If the current owners are still in residence, move their furniture. That means pulling every dresser away from the wall, especially under windows, to check for leaks, cracks and incomplete paint jobs.
- Pull back the rugs - you never can tell what those fine threads are hiding.
- Visit at different times of the day and night to gauge street noise.
- Turn on as many kitchen appliances as possible, simultaneously, to see whether the electrical system can handle the strain.
- Turn on every light in every room. And bring a small appliance to plug in to outlets to see if they work. (Your phone charger is handy for this.)
- While the dishwasher and the washing machine are running, head to the shower and turn on the hot tap. What about the water pressure and the temperature? What happens when you flush the toilet?
- Ring the doorbell, and test the alarm if there is one.
- Find out if the neighbours own any dogs. If they have an aggressive breed and you don't have a fence, perhaps this isn't the best backyard for your toddler.
- If you're buying an apartment, ask residents next door, above, and below to turn on their stereos and television sets and just walk around.
- Get estimates for ongoing maintenance: In a condominium, find out how many times the common charges have been raised during the past five years and by how much.
This article was first published in The New Paper on Aug 9, 2008.
Make sure it doesn't turn into a nightmare. So, what should you do before saying 'I do' to one of the biggest financial commitments of your life?
Sun, Aug 10, 2008
The New Paper
By Suze Orman
FOR most people, the decision to buy a home hits like love at first sight: After endless rounds of dating, you finally find that special one.
You walk in the front door and swoon over the refinished hardwood floors.
Your eyes lock on the high ceilings.
Your heart pounds at the fabulous kitchen and the huge yard.
While I totally understand leading with your heart, use your head too.
Before saying 'I do' to one of the biggest financial commitments of your life, you need to follow up with a few repeat visits checking out every nook and cranny for big-ticket problems.
If you're buying directly from the developer, please don't get snookered into believing new means perfect.
Every single house or apartment needs a thorough inspection.
HERE'S A CHECKLIST
- Cast your eye high and low, to and fro, to spot cracks or leaks outside your 'normal' field of vision.
- If the current owners are still in residence, move their furniture. That means pulling every dresser away from the wall, especially under windows, to check for leaks, cracks and incomplete paint jobs.
- Pull back the rugs - you never can tell what those fine threads are hiding.
- Visit at different times of the day and night to gauge street noise.
- Turn on as many kitchen appliances as possible, simultaneously, to see whether the electrical system can handle the strain.
- Turn on every light in every room. And bring a small appliance to plug in to outlets to see if they work. (Your phone charger is handy for this.)
- While the dishwasher and the washing machine are running, head to the shower and turn on the hot tap. What about the water pressure and the temperature? What happens when you flush the toilet?
- Ring the doorbell, and test the alarm if there is one.
- Find out if the neighbours own any dogs. If they have an aggressive breed and you don't have a fence, perhaps this isn't the best backyard for your toddler.
- If you're buying an apartment, ask residents next door, above, and below to turn on their stereos and television sets and just walk around.
- Get estimates for ongoing maintenance: In a condominium, find out how many times the common charges have been raised during the past five years and by how much.
This article was first published in The New Paper on Aug 9, 2008.
Sunday, August 3, 2008
Borrow big to pay for your home? It may not be foolhardy
Aug 3, 2008
small change
Borrow big to pay for your home? It may not be foolhardy
Taking out a huge real estate loan seems risky, but it may sometimes
be a better option
By Dennis Chan, Deputy Money Editor
After my last Small Change column was published, a colleague came up
to me and said: 'Property isn't a high-risk investment.
'In fact, it appeals to a low-risk investor like me who doesn't know
enough to invest in stocks and shares. What- ever spare cash I have,
I use it to pay off my housing loan.'
I had argued in my column that property investment is a high-risk,
high-reward game, using the example of a $1 million home bought with
$100,000 cash and $900,000 borrowed.
If the price of the home rises by 10 per cent, it will be worth $1.1
million and the investor would have doubled his initial capital. But
if it were to fall by an equal amount, his capital would have been
wiped out.
So who's right?
Both of us are.
Residential property is a familiar investment to many Singaporeans
since home ownership became the cornerstone of government policy in
the mid-1960s.
Indeed, whether you are a sophisticated investor or one wet behind
the ears, you can't go wrong buying a home as a long-term investment
in land-scarce Singapore. Seen in this light, it is a safe
investment.
It becomes highly risky only when one buys a second, third or fourth
property leveraging on borrowings and relying substantially on rental
incomes to service the loans.
On reflection, I realise there are many people like my colleague who
pay down their housing loans very early, and take pride in doing so.
This sentiment is entirely understandable. Many of us take home
ownership for granted, thanks to the Government's hugely successful
public housing programme.
But for the older generation and the one before that, the fear of not
having a roof over one's head was very real.
To them, it's an achievement to own a fully paid-up home as quickly
as possible.
To these people, I say: 'Go ahead, if you can afford it.'
'What do you mean?' you may retort. 'If I take my spare cash to repay
my home loan, surely I can afford it.'
Not necessarily.
There is a cost in putting too much equity into a home purchase.
To illustrate, let's take the example of two young couples - X and Y -
who buy a Housing Board resale flat at the market valuation price of
$500,000.
Let's assume each couple have savings totalling $150,000 in their
Central Provident Fund Ordinary Accounts (OA) and a combined monthly
income of $6,000. Both are are entitled to an HDB concessionary loan -
currently at 2.6 per cent a year.
Under the rules, buyers are allowed to pay 10 per cent as down
payment and borrow the remaining 90 per cent to finance their
purchase.
Couple X, being very prudent, choose to use up all their OA balances
to pay for their home. They take out a 30-year, $350,000 loan to
finance the rest. For simplicity's sake, let's assume the entire
$150,000 goes towards paying the down payment. In reality, the actual
amount will be less, minus the money to pay stamp duty, home
protection scheme insurance and legal fees.
Couple Y, being more gung-ho, decide to pay the minimum down payment
of 10 per cent, which works out to $50,000. They, too, take a 30-year
loan but for a higher amount of $450,000.
Using a financial calculator, Couple X and Couple Y's monthly loan
instalments work out to about $1,400 and $1,800 respectively.
Couple X's monthly CPF OA contribution totalling $1,380 is almost
just about able to cover fully their monthly instalment whereas
Couple Y would have to top up an additional $420 in cash.
At the end of 30 years, Couple X will have paid a total of $504,000
to repay their $350,000 loan whereas Couple Y will have coughed out
$648,000 on their $450,000 loan.
Interest charges by Couple X and Couple Y over this period work out
to $154,000 and $198,000 respectively.
On the face of it, Couple X seem far better off. Their monthly
repayment is lower and they incur $44,000 less in interest charges.
On closer inspection, the benefits of borrowing less are not that
clear cut.
Firstly, one needs to take into account that Couple Y kept $100,000
of their OAs from the start. This means they get to earn annual
interest income, which Couple X will forgo until their CPF
contributions from income accumulate again.
Interest payment for OA balances is 2.5 per cent a year. For the
first $20,000, a higher interest of 3.5 per cent applies.
Insofar as the first $20,000 is concerned, it is better to leave the
money untouched and earning 3.5 per cent a year than to use it to pay
off an HDB loan that charges 2.6 per cent per annum.
As for amounts greater than $20,000, one doesn't lose much either
since the difference between interest payable on an HDB loan and
earned for money kept in the OA is a mere 0.1 percentage point (2.6
per cent - 2.5 per cent).
Secondly, keeping substantial savings in the OA can be an important
buffer to cope with a temporary loss of income.
The sum of $100,000 is equivalent to five years' worth of monthly
repayments. So even if one or both persons who make up Couple Y were
to stop working for some reason or quit to start a family or take a
sabbatical, they can continue to service their loan entirely from
their OAs for about five years while looking for their next job.
Couple X, on the other hand, will have no such luxury. They will be
forced to tap their cash savings immediately in similar
circumstances.
Thirdly, having some spare savings in the OA opens up investment
opportunities and flexibility.
Bear in mind that the HDB loan at 2.6 per cent is really cheap money.
Last year, insurer Aviva offered an endowment plan called Big e that
paid up to 3.5 per cent in interest a year. The plan, which
guaranteed a return higher than 2.5 per cent, has since been
discontinued.
However, such opportunities that offer low-risk returns based on
positive interest differential (3.5 per cent - 2.6 per cent) can be
expected to surface from time to time.
For those with a higher risk appetite, there are also numerous CPF-
approved investments that have a track record of generating annual
returns in excess of 5 per cent over the mid to long term.
Although I used the HDB flat purchase as an example, the argument is
also valid for private property purchases, given the current low
interest rate environment.
Fourthly, if your flat is rented out, you can apply to the taxman to
offset your rental income with the interest paid on the loan. So the
bigger the loan amount, the higher will be the interest offset.
Finally, if all else fails and there is no reasonable opportunity to
earn a better return, there is always the option of using your OA
balance to pay down your housing debt at any time.
Bear in mind this option is irreversible. You can pay down a housing
loan but you cannot top it up.
Do note that if you take an HDB loan, you must 'invest' your excess
OA balance before your first appointment with the board.
That is because HDB will exhaust your OA for down payment - minus the
amount for stamp duty, legal fees and home protection insurance -
before granting you a loan.
In the earlier example, Couple Y would have to withdraw from their
OAs the sum of $100,000 - or an appropriate amount after taking into
account the 10 per cent down payment and ancillary charges - and put
it into a CPF-approved investment.
If the investment is meant to be a temporary one, choosing a low-
risk, low-return fund like DBS Enhanced Income Fund would be
appropriate.
After the first appointment, you may liquidate the investment and
return the proceeds to your OA.
Be aware that this 'round tripping' is not cost free as agent bank
fees and sales charges apply. These charges are nominal though.
To sum up, taking on a big housing debt is not necessarily a bad
thing. In certain circumstances, it may even be the prudent thing to
do.
Whether you choose to be Couple X or Couple Y, you must do your sums
and feel comfortable with the plan.
small change
Borrow big to pay for your home? It may not be foolhardy
Taking out a huge real estate loan seems risky, but it may sometimes
be a better option
By Dennis Chan, Deputy Money Editor
After my last Small Change column was published, a colleague came up
to me and said: 'Property isn't a high-risk investment.
'In fact, it appeals to a low-risk investor like me who doesn't know
enough to invest in stocks and shares. What- ever spare cash I have,
I use it to pay off my housing loan.'
I had argued in my column that property investment is a high-risk,
high-reward game, using the example of a $1 million home bought with
$100,000 cash and $900,000 borrowed.
If the price of the home rises by 10 per cent, it will be worth $1.1
million and the investor would have doubled his initial capital. But
if it were to fall by an equal amount, his capital would have been
wiped out.
So who's right?
Both of us are.
Residential property is a familiar investment to many Singaporeans
since home ownership became the cornerstone of government policy in
the mid-1960s.
Indeed, whether you are a sophisticated investor or one wet behind
the ears, you can't go wrong buying a home as a long-term investment
in land-scarce Singapore. Seen in this light, it is a safe
investment.
It becomes highly risky only when one buys a second, third or fourth
property leveraging on borrowings and relying substantially on rental
incomes to service the loans.
On reflection, I realise there are many people like my colleague who
pay down their housing loans very early, and take pride in doing so.
This sentiment is entirely understandable. Many of us take home
ownership for granted, thanks to the Government's hugely successful
public housing programme.
But for the older generation and the one before that, the fear of not
having a roof over one's head was very real.
To them, it's an achievement to own a fully paid-up home as quickly
as possible.
To these people, I say: 'Go ahead, if you can afford it.'
'What do you mean?' you may retort. 'If I take my spare cash to repay
my home loan, surely I can afford it.'
Not necessarily.
There is a cost in putting too much equity into a home purchase.
To illustrate, let's take the example of two young couples - X and Y -
who buy a Housing Board resale flat at the market valuation price of
$500,000.
Let's assume each couple have savings totalling $150,000 in their
Central Provident Fund Ordinary Accounts (OA) and a combined monthly
income of $6,000. Both are are entitled to an HDB concessionary loan -
currently at 2.6 per cent a year.
Under the rules, buyers are allowed to pay 10 per cent as down
payment and borrow the remaining 90 per cent to finance their
purchase.
Couple X, being very prudent, choose to use up all their OA balances
to pay for their home. They take out a 30-year, $350,000 loan to
finance the rest. For simplicity's sake, let's assume the entire
$150,000 goes towards paying the down payment. In reality, the actual
amount will be less, minus the money to pay stamp duty, home
protection scheme insurance and legal fees.
Couple Y, being more gung-ho, decide to pay the minimum down payment
of 10 per cent, which works out to $50,000. They, too, take a 30-year
loan but for a higher amount of $450,000.
Using a financial calculator, Couple X and Couple Y's monthly loan
instalments work out to about $1,400 and $1,800 respectively.
Couple X's monthly CPF OA contribution totalling $1,380 is almost
just about able to cover fully their monthly instalment whereas
Couple Y would have to top up an additional $420 in cash.
At the end of 30 years, Couple X will have paid a total of $504,000
to repay their $350,000 loan whereas Couple Y will have coughed out
$648,000 on their $450,000 loan.
Interest charges by Couple X and Couple Y over this period work out
to $154,000 and $198,000 respectively.
On the face of it, Couple X seem far better off. Their monthly
repayment is lower and they incur $44,000 less in interest charges.
On closer inspection, the benefits of borrowing less are not that
clear cut.
Firstly, one needs to take into account that Couple Y kept $100,000
of their OAs from the start. This means they get to earn annual
interest income, which Couple X will forgo until their CPF
contributions from income accumulate again.
Interest payment for OA balances is 2.5 per cent a year. For the
first $20,000, a higher interest of 3.5 per cent applies.
Insofar as the first $20,000 is concerned, it is better to leave the
money untouched and earning 3.5 per cent a year than to use it to pay
off an HDB loan that charges 2.6 per cent per annum.
As for amounts greater than $20,000, one doesn't lose much either
since the difference between interest payable on an HDB loan and
earned for money kept in the OA is a mere 0.1 percentage point (2.6
per cent - 2.5 per cent).
Secondly, keeping substantial savings in the OA can be an important
buffer to cope with a temporary loss of income.
The sum of $100,000 is equivalent to five years' worth of monthly
repayments. So even if one or both persons who make up Couple Y were
to stop working for some reason or quit to start a family or take a
sabbatical, they can continue to service their loan entirely from
their OAs for about five years while looking for their next job.
Couple X, on the other hand, will have no such luxury. They will be
forced to tap their cash savings immediately in similar
circumstances.
Thirdly, having some spare savings in the OA opens up investment
opportunities and flexibility.
Bear in mind that the HDB loan at 2.6 per cent is really cheap money.
Last year, insurer Aviva offered an endowment plan called Big e that
paid up to 3.5 per cent in interest a year. The plan, which
guaranteed a return higher than 2.5 per cent, has since been
discontinued.
However, such opportunities that offer low-risk returns based on
positive interest differential (3.5 per cent - 2.6 per cent) can be
expected to surface from time to time.
For those with a higher risk appetite, there are also numerous CPF-
approved investments that have a track record of generating annual
returns in excess of 5 per cent over the mid to long term.
Although I used the HDB flat purchase as an example, the argument is
also valid for private property purchases, given the current low
interest rate environment.
Fourthly, if your flat is rented out, you can apply to the taxman to
offset your rental income with the interest paid on the loan. So the
bigger the loan amount, the higher will be the interest offset.
Finally, if all else fails and there is no reasonable opportunity to
earn a better return, there is always the option of using your OA
balance to pay down your housing debt at any time.
Bear in mind this option is irreversible. You can pay down a housing
loan but you cannot top it up.
Do note that if you take an HDB loan, you must 'invest' your excess
OA balance before your first appointment with the board.
That is because HDB will exhaust your OA for down payment - minus the
amount for stamp duty, legal fees and home protection insurance -
before granting you a loan.
In the earlier example, Couple Y would have to withdraw from their
OAs the sum of $100,000 - or an appropriate amount after taking into
account the 10 per cent down payment and ancillary charges - and put
it into a CPF-approved investment.
If the investment is meant to be a temporary one, choosing a low-
risk, low-return fund like DBS Enhanced Income Fund would be
appropriate.
After the first appointment, you may liquidate the investment and
return the proceeds to your OA.
Be aware that this 'round tripping' is not cost free as agent bank
fees and sales charges apply. These charges are nominal though.
To sum up, taking on a big housing debt is not necessarily a bad
thing. In certain circumstances, it may even be the prudent thing to
do.
Whether you choose to be Couple X or Couple Y, you must do your sums
and feel comfortable with the plan.
Monday, April 28, 2008
HDB SURPLUS FLATS
April 28, 2008
HDB SURPLUS FLATS
Sweepstake that draws the plucky opportunist
By Dennis Chan
I DON'T know if the Government knows this.
Many first-time buyers of Housing Board flats are treating the balloting system for new units as a chance to strike the lottery.
You can tell them apart from genuine home buyers because they will faithfully put in an application whenever new flats are offered for sale in mature estates.
Occasionally, they may test the waters by applying for flats in new townships but will find excuses to reject them should they be successful in getting a queue number.
Like seasoned 4-D punters, they are undeterred by repeated failures to land the Big Prize - a new flat in much sought-after towns such as Queenstown, Toa Payoh and Telok Blangah.
A colleague's son has balloted unsuccessfully on more than 10 occasions for flats in mature estates. He's not compromising, preferring to wait for the next offer of new flats in such estates instead of buying a resale flat or booking a Build-To-Order (BTO) flat under the mainstay programme for new public housing.
BTO flats are less popular as they tend to be in outlying areas like Sengkang.
A desire to live near their parents or workplace is often cited by couples as a reason for wanting a flat in a mature estate. Some even resort to creative 'threats', arguing that the Government's effort to encourage Singaporeans to marry early and have more children is undermined by its failure to provide them with affordable homes in a location of their choice.
I remember feeling incredulous when reading a story in this paper last November, 'No (HDB flat) = No (wedding)', in which a couple said they delayed their marriage plans because they could not get a new flat in Ang Mo Kio or Toa Payoh.
'Were they for real?' I wondered.
To be sure, some reasons are valid, such as wanting to live near aged parents who are in poor health. But for the majority, I suspect the real reason for being picky boils down to dollars and cents.
Landing a new flat in a mature estate and selling it after five years can yield several hundred thousand dollars in profit. Who would want to give up this once-in-a-lifetime windfall by accepting a flat in a less desirable address?
While the HDB allows upgraders to buy a second new flat, in reality, their chances of doing so are very slim due to priority for first-timers.
Consider this: In 1996, my wife and I bought a five-room flat for $160,000 in Woodlands. In the same month, my parents-in-law balloted successfully for a four-room flat in Holland Village. Coincidentally, the price tag was also about $160,000.
Last December, I sold my flat for $300,000. During that same period, one four-room flat in my in-laws' block fetched $550,000 while another went for $589,000.
This underlines once again the widely held belief that homes in prime locations appreciate in value faster than those in outlying areas.
Is it any wonder then that many first-timers stubbornly refuse to accept flats other than those in mature estates?
Also, the dice is loaded in their favour. Under the HDB priority scheme, first-time buyers and newly-weds get an extra chance in a future ballot every time they are unsuccessful in selecting a new flat.
Even so, competition is stiff. In February, the HDB received 9,900 applications for 278 surplus new flats in mature towns.
Some ingenuous buyers have tried to exploit the system to improve their chances.
There are anecdotes of first-timers applying for BTO flats they have no intention of taking up in the hope of accelerating their failure rate so as to enjoy a higher chance of success by the time flats in a desirable area are available.
If they are 'lucky' and get picked to select a BTO flat, they will just turn it down. After all, there is no penalty.
One couple, shortlisted for a BTO flat in Punggol last year, did not pick a flat despite having more than 400 units to choose from, according to the HDB. They subsequently applied for a BTO project in Yishun and complained publicly when they were not successful.
This lack of deterrence has prompted National Development Minister Mah Bow Tan to ask the HDB to review its application process to discourage such people.
One possible solution is to revert to the Registration for Flats System for BTO flats. Under this, buyers form two queues - one for first-timers and the other for upgraders. The queue for first-timers will move a great deal quicker.
Buyers who reach the head of queues will be invited to pick a flat. If they don't, they will be considered dropouts and will have to start all over again if they wish to re-apply for a new HDB flat.
As an extra deterrent, the HDB might consider imposing a registration fee on new buyers who join the queue. This can be used to offset the purchase price if they subsequently select a flat.
In the past, the fee was $200 for first-timers and $600 for upgraders, excluding GST.
As for surplus flats in mature estates, the HDB should bar upgraders from buying them since they already have a home. This will leave the field open only to first-timers.
Do away with the complicated system of multiple chances for failed attempts and give all an equal chance in a ballot. After all, you don't ask Singapore Pools to increase your chance vis-a-vis a novice just because you have not had a winning ticket after years of trying, do you?
As surplus flats are so few and applicants so many, treat them as what they really are - a sweepstake, with prized homes going to the lucky few.
dennis@sph.com.sg
EastLiving.com.sg
Contact Stuart Chng: (65) 9691 9907
Email: stuart.chng@eastliving.com.sg
EastLiving - Singapore Property and Real Estate DB
HDB SURPLUS FLATS
Sweepstake that draws the plucky opportunist
By Dennis Chan
I DON'T know if the Government knows this.
Many first-time buyers of Housing Board flats are treating the balloting system for new units as a chance to strike the lottery.
You can tell them apart from genuine home buyers because they will faithfully put in an application whenever new flats are offered for sale in mature estates.
Occasionally, they may test the waters by applying for flats in new townships but will find excuses to reject them should they be successful in getting a queue number.
Like seasoned 4-D punters, they are undeterred by repeated failures to land the Big Prize - a new flat in much sought-after towns such as Queenstown, Toa Payoh and Telok Blangah.
A colleague's son has balloted unsuccessfully on more than 10 occasions for flats in mature estates. He's not compromising, preferring to wait for the next offer of new flats in such estates instead of buying a resale flat or booking a Build-To-Order (BTO) flat under the mainstay programme for new public housing.
BTO flats are less popular as they tend to be in outlying areas like Sengkang.
A desire to live near their parents or workplace is often cited by couples as a reason for wanting a flat in a mature estate. Some even resort to creative 'threats', arguing that the Government's effort to encourage Singaporeans to marry early and have more children is undermined by its failure to provide them with affordable homes in a location of their choice.
I remember feeling incredulous when reading a story in this paper last November, 'No (HDB flat) = No (wedding)', in which a couple said they delayed their marriage plans because they could not get a new flat in Ang Mo Kio or Toa Payoh.
'Were they for real?' I wondered.
To be sure, some reasons are valid, such as wanting to live near aged parents who are in poor health. But for the majority, I suspect the real reason for being picky boils down to dollars and cents.
Landing a new flat in a mature estate and selling it after five years can yield several hundred thousand dollars in profit. Who would want to give up this once-in-a-lifetime windfall by accepting a flat in a less desirable address?
While the HDB allows upgraders to buy a second new flat, in reality, their chances of doing so are very slim due to priority for first-timers.
Consider this: In 1996, my wife and I bought a five-room flat for $160,000 in Woodlands. In the same month, my parents-in-law balloted successfully for a four-room flat in Holland Village. Coincidentally, the price tag was also about $160,000.
Last December, I sold my flat for $300,000. During that same period, one four-room flat in my in-laws' block fetched $550,000 while another went for $589,000.
This underlines once again the widely held belief that homes in prime locations appreciate in value faster than those in outlying areas.
Is it any wonder then that many first-timers stubbornly refuse to accept flats other than those in mature estates?
Also, the dice is loaded in their favour. Under the HDB priority scheme, first-time buyers and newly-weds get an extra chance in a future ballot every time they are unsuccessful in selecting a new flat.
Even so, competition is stiff. In February, the HDB received 9,900 applications for 278 surplus new flats in mature towns.
Some ingenuous buyers have tried to exploit the system to improve their chances.
There are anecdotes of first-timers applying for BTO flats they have no intention of taking up in the hope of accelerating their failure rate so as to enjoy a higher chance of success by the time flats in a desirable area are available.
If they are 'lucky' and get picked to select a BTO flat, they will just turn it down. After all, there is no penalty.
One couple, shortlisted for a BTO flat in Punggol last year, did not pick a flat despite having more than 400 units to choose from, according to the HDB. They subsequently applied for a BTO project in Yishun and complained publicly when they were not successful.
This lack of deterrence has prompted National Development Minister Mah Bow Tan to ask the HDB to review its application process to discourage such people.
One possible solution is to revert to the Registration for Flats System for BTO flats. Under this, buyers form two queues - one for first-timers and the other for upgraders. The queue for first-timers will move a great deal quicker.
Buyers who reach the head of queues will be invited to pick a flat. If they don't, they will be considered dropouts and will have to start all over again if they wish to re-apply for a new HDB flat.
As an extra deterrent, the HDB might consider imposing a registration fee on new buyers who join the queue. This can be used to offset the purchase price if they subsequently select a flat.
In the past, the fee was $200 for first-timers and $600 for upgraders, excluding GST.
As for surplus flats in mature estates, the HDB should bar upgraders from buying them since they already have a home. This will leave the field open only to first-timers.
Do away with the complicated system of multiple chances for failed attempts and give all an equal chance in a ballot. After all, you don't ask Singapore Pools to increase your chance vis-a-vis a novice just because you have not had a winning ticket after years of trying, do you?
As surplus flats are so few and applicants so many, treat them as what they really are - a sweepstake, with prized homes going to the lucky few.
dennis@sph.com.sg
EastLiving.com.sg
Contact Stuart Chng: (65) 9691 9907
Email: stuart.chng@eastliving.com.sg
EastLiving - Singapore Property and Real Estate DB
Sunday, April 20, 2008
Before you refinance your home loan...
April 20, 2008
Before you refinance your home loan...
The current downward trend in home loan rates provides a compelling reason for home owners to review their mortgage packages. Lorna Tan looks at five things to consider when refinancing your home loan
WITH interest rates in Singapore still falling and the property market turning quiet, banks are now gunning for the mortgage refinancing business.
Refinancing means replacing your current mortgage with another that comes with lower interest rates. This can be done with the same bank or by switching to another bank.
Many home owners are now considering this because the Singapore Inter-bank Offered Rate (Sibor) has fallen from over 3 per cent to below 1.3 per cent. Sibor, the rate at which banks lend to one another, is a key component used in setting home loan rates.
Some home owners have taken the bait. At HSBC Singapore, for example, refinancing applications have increased by more than 50 per cent in number over the past three months. Other banks, such as United Overseas Bank, have been circulating new refinancing packages by mail to home owners.
But before you take the plunge, you should be aware that refinancing a mortgage comes at a cost. Penalties could be imposed if you terminate your housing loan early with your existing lender, and you could incur legal fees if you refinance the loan with another bank.
Mr Dennis Ng, the founder of mortgage consultancy portal www.HousingLoanSG.com, reckons that if you are paying 3.5 per cent or higher on your home loan, you should be able to enjoy savings in interest by refinancing the loan.
He has worked out that, based on a 30-year loan tenure, refinancing an outstanding loan amount of $215,000 to a lower interest rate of 2.2 per cent, down from the current 4.5 per cent, would result in interest savings of about $14,730 over three years.
--------------------------------------------------------------------------------
Balance your options
A mortgage with a lower interest rate might seem more attractive, but before you refinance your loan, consider these factors:
· Lock-in period
· Penalty for early loan redemption
· Conversion fee
· Legal subsidy
· Choice of fixed, variable or interest rate-linked rates
· Cash rebates
· Flexibility to make partial loan redemption
· Free fire insurance
· Affordability
--------------------------------------------------------------------------------
Five things to note before you switch
1 When you should consider refinancing
Scenario 1
The savings outweigh the costs of refinancing. In other words, do your sums first.
Scenario 2
You do not plan to sell your property within the next 12 months.
Maybank Singapore's head of consumer banking, Ms Helen Neo, said it does not make sense to refinance if you plan to sell your home in the short term.
'Home owners have to pay redemption fees, and even refund legal subsidies or cashbacks to the banks,' she said.
Mr Dennis Ng, the founder of mortgage consultancy portal www.HousingLoanSG.com, added you typically need to give three months' notice to your existing bank before switching. If you sell your property within nine months, say, you will enjoy interest savings for only six months. Your savings might not be much higher than the refinancing costs.
2 What refinancing will cost you
With the same bank
· Within the lock-in period Check if your package has a lock-in period. During this time, usually two to three years, you have to pay a penalty if you withdraw your loan. It's usually 1-1.5 per cent of the outstanding loan amount.
Also, there is a conversion fee of $500 to $1,000.
· Outside the lock-in period The cost is just the conversion fee.
With another bank
With banks pulling out all the stops to garner a larger slice of the home loans market, it is worth your while to shop around. DBS Bank, for example, has customised packages that subsidise penalty payments, while Standard Chartered Bank (Stanchart) is repricing home loans down for existing customers on selected packages.
OCBC Bank's head of consumer secured lending, Mr Gregory Chan, encourages customers to talk to their lenders first before leaving for another bank. This is because the actual charges incurred could vary depending on various factors, which could include the time till the lock-in period expires and the customer's business relationship with the bank.
· Within the lock-in period
Besides having to cough up a penalty for early loan redemption, you will have to refund the subsidy on legal costs provided by your current bank.
Capped at $2,000, the subsidy is calculated based on 0.4 per cent of the loan amount, plus the cost of the $500 stamp duty. Most banks will offer a subsidy of up to $2,000, depending on the loan amount.
If your loan amount is, say, $500,000, the bank is likely to have given you a subsidy of $2,000.
· Outside the lock-in period
Normally, you don't need to pay your current bank penalties or administrative fees.
However, you might have to reimburse the bank for freebies you received when you first took out the loan. These could include legal subsidies, free fire insurance on the property and promotional shopping vouchers, said Citibank Singapore's business director, Mr Tan Chia Seng.
Whether you are inside or outside the lock-in period, refinancing a home loan with another bank means incurring legal fees again.
3 Which home loans benefit you most
There are more than 113 different home loan packages in the market.
· Fixed rates
Depending on your 'risk tolerance', you can consider locking in your loan at the current low interest rates for the next two to three years. This means going for fixed-rate loan packages in which the rates are fixed for the first two to three years.
· Pegged rates
If price transparency is a must and you believe interest rates are likely to remain low in the next 12 months, you can consider packages with rates pegged to the Singapore Inter-bank Offered Rate (Sibor) or other benchmark rates as you will automatically enjoy lower loan rates when interest rates fall further.
Said OCBC's Mr Chan: 'If fixed cash flow and protection against interest rate hikes are of utmost importance, our fixed-rate packages would be more appropriate.'
· Zero penalty for switching
Those who are thinking of selling their property in the next two to three years should choose a package with a shorter penalty period or one with no penalties attached. For a loan amount of $500,000, you would save $7,500 if you chose a package with no penalties attached over one that imposes a penalty charged at 1.5 per cent of the loan amount, said Mr Ng.
4 Which expenses you have to budget for
Rates don't stay depressed forever. When refinancing, do not underestimate other expenses in a lower interest rate environment only to find yourself unable to pay your debts and monthly instalments when rates rise later, said Mr Dennis Khoo, the general manager of wealth management at Stanchart.
Borrowers should ensure they are not over-exposed to debt repayments. Set aside enough cash to cover at least six to 12 months of all necessary expenses such as utilities and phone bills, he said.
5 Which packages offer favourable incentives
There are more than rates to consider when refinancing.
· Partial loan repayment
Pick a package that does not penalise you for partial repayments. This means you can lower your overall loan balance whenever you wish to redeem part of your loan.
· Free loan conversion
If your property is still under construction, ask for a package with a 'free loan conversion'. This lets you switch to a package with lower rates when you get your temporary occupation permit.
· Rebates
If a package offers a cash rebate, check if it is refundable and if there will be any additional penalty charges should you withdraw within the lock-in period.
· Free fire insurance
Some lenders throw this in.
lorna@sph.com.sg
Copyright © 2007 Singapore Press Holdings. All rights reserved. Privacy Statement & Condition of Access
EastLiving.com.sg
Contact Stuart Chng: (65) 9691 9907
Email: stuart.chng@eastliving.com.sg
EastLiving - Singapore Property and Real Estate DB
Before you refinance your home loan...
The current downward trend in home loan rates provides a compelling reason for home owners to review their mortgage packages. Lorna Tan looks at five things to consider when refinancing your home loan
WITH interest rates in Singapore still falling and the property market turning quiet, banks are now gunning for the mortgage refinancing business.
Refinancing means replacing your current mortgage with another that comes with lower interest rates. This can be done with the same bank or by switching to another bank.
Many home owners are now considering this because the Singapore Inter-bank Offered Rate (Sibor) has fallen from over 3 per cent to below 1.3 per cent. Sibor, the rate at which banks lend to one another, is a key component used in setting home loan rates.
Some home owners have taken the bait. At HSBC Singapore, for example, refinancing applications have increased by more than 50 per cent in number over the past three months. Other banks, such as United Overseas Bank, have been circulating new refinancing packages by mail to home owners.
But before you take the plunge, you should be aware that refinancing a mortgage comes at a cost. Penalties could be imposed if you terminate your housing loan early with your existing lender, and you could incur legal fees if you refinance the loan with another bank.
Mr Dennis Ng, the founder of mortgage consultancy portal www.HousingLoanSG.com, reckons that if you are paying 3.5 per cent or higher on your home loan, you should be able to enjoy savings in interest by refinancing the loan.
He has worked out that, based on a 30-year loan tenure, refinancing an outstanding loan amount of $215,000 to a lower interest rate of 2.2 per cent, down from the current 4.5 per cent, would result in interest savings of about $14,730 over three years.
--------------------------------------------------------------------------------
Balance your options
A mortgage with a lower interest rate might seem more attractive, but before you refinance your loan, consider these factors:
· Lock-in period
· Penalty for early loan redemption
· Conversion fee
· Legal subsidy
· Choice of fixed, variable or interest rate-linked rates
· Cash rebates
· Flexibility to make partial loan redemption
· Free fire insurance
· Affordability
--------------------------------------------------------------------------------
Five things to note before you switch
1 When you should consider refinancing
Scenario 1
The savings outweigh the costs of refinancing. In other words, do your sums first.
Scenario 2
You do not plan to sell your property within the next 12 months.
Maybank Singapore's head of consumer banking, Ms Helen Neo, said it does not make sense to refinance if you plan to sell your home in the short term.
'Home owners have to pay redemption fees, and even refund legal subsidies or cashbacks to the banks,' she said.
Mr Dennis Ng, the founder of mortgage consultancy portal www.HousingLoanSG.com, added you typically need to give three months' notice to your existing bank before switching. If you sell your property within nine months, say, you will enjoy interest savings for only six months. Your savings might not be much higher than the refinancing costs.
2 What refinancing will cost you
With the same bank
· Within the lock-in period Check if your package has a lock-in period. During this time, usually two to three years, you have to pay a penalty if you withdraw your loan. It's usually 1-1.5 per cent of the outstanding loan amount.
Also, there is a conversion fee of $500 to $1,000.
· Outside the lock-in period The cost is just the conversion fee.
With another bank
With banks pulling out all the stops to garner a larger slice of the home loans market, it is worth your while to shop around. DBS Bank, for example, has customised packages that subsidise penalty payments, while Standard Chartered Bank (Stanchart) is repricing home loans down for existing customers on selected packages.
OCBC Bank's head of consumer secured lending, Mr Gregory Chan, encourages customers to talk to their lenders first before leaving for another bank. This is because the actual charges incurred could vary depending on various factors, which could include the time till the lock-in period expires and the customer's business relationship with the bank.
· Within the lock-in period
Besides having to cough up a penalty for early loan redemption, you will have to refund the subsidy on legal costs provided by your current bank.
Capped at $2,000, the subsidy is calculated based on 0.4 per cent of the loan amount, plus the cost of the $500 stamp duty. Most banks will offer a subsidy of up to $2,000, depending on the loan amount.
If your loan amount is, say, $500,000, the bank is likely to have given you a subsidy of $2,000.
· Outside the lock-in period
Normally, you don't need to pay your current bank penalties or administrative fees.
However, you might have to reimburse the bank for freebies you received when you first took out the loan. These could include legal subsidies, free fire insurance on the property and promotional shopping vouchers, said Citibank Singapore's business director, Mr Tan Chia Seng.
Whether you are inside or outside the lock-in period, refinancing a home loan with another bank means incurring legal fees again.
3 Which home loans benefit you most
There are more than 113 different home loan packages in the market.
· Fixed rates
Depending on your 'risk tolerance', you can consider locking in your loan at the current low interest rates for the next two to three years. This means going for fixed-rate loan packages in which the rates are fixed for the first two to three years.
· Pegged rates
If price transparency is a must and you believe interest rates are likely to remain low in the next 12 months, you can consider packages with rates pegged to the Singapore Inter-bank Offered Rate (Sibor) or other benchmark rates as you will automatically enjoy lower loan rates when interest rates fall further.
Said OCBC's Mr Chan: 'If fixed cash flow and protection against interest rate hikes are of utmost importance, our fixed-rate packages would be more appropriate.'
· Zero penalty for switching
Those who are thinking of selling their property in the next two to three years should choose a package with a shorter penalty period or one with no penalties attached. For a loan amount of $500,000, you would save $7,500 if you chose a package with no penalties attached over one that imposes a penalty charged at 1.5 per cent of the loan amount, said Mr Ng.
4 Which expenses you have to budget for
Rates don't stay depressed forever. When refinancing, do not underestimate other expenses in a lower interest rate environment only to find yourself unable to pay your debts and monthly instalments when rates rise later, said Mr Dennis Khoo, the general manager of wealth management at Stanchart.
Borrowers should ensure they are not over-exposed to debt repayments. Set aside enough cash to cover at least six to 12 months of all necessary expenses such as utilities and phone bills, he said.
5 Which packages offer favourable incentives
There are more than rates to consider when refinancing.
· Partial loan repayment
Pick a package that does not penalise you for partial repayments. This means you can lower your overall loan balance whenever you wish to redeem part of your loan.
· Free loan conversion
If your property is still under construction, ask for a package with a 'free loan conversion'. This lets you switch to a package with lower rates when you get your temporary occupation permit.
· Rebates
If a package offers a cash rebate, check if it is refundable and if there will be any additional penalty charges should you withdraw within the lock-in period.
· Free fire insurance
Some lenders throw this in.
lorna@sph.com.sg
Copyright © 2007 Singapore Press Holdings. All rights reserved. Privacy Statement & Condition of Access
EastLiving.com.sg
Contact Stuart Chng: (65) 9691 9907
Email: stuart.chng@eastliving.com.sg
EastLiving - Singapore Property and Real Estate DB
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