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How To Select Home Loan – Special Features

Special Features

Now we go to step 3 in the 5-step process by looking at any special unique features offered by the bank.

Once again to recap the 5 steps for choosing a home loan are:

  1. Interest Rate
  2. Loan Restrictions (eg. lock-in period, prepayment penalty etc.)
  3. Special Features (eg. interest offset account, switching between sibor periods etc)?
  4. Personal Considerations
  5. Tenure and Loan-to-Value (LTV)

Besides the interest rate, banks do offer various interesting features in Singapore to entice customers to sign up with their loan package, some of these are intrinsic to the loan itself, others some kind of bundling with other products and services with the bank.  Let us take a look at some of the more meaningful ones we think you might like to consider on top of interest rates.

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Before we go on, do note that the information given here may have changed or become obsolete by the time you read this blog post.  Bank packages and loan features are subject to review and change sometimes products are canned.  The information is accurate at time of writing this post which is in September 2014.

(a)  Interest Offset Account

Not all banks offer this.  DBS used to offer it but has since stopped.  The only bank marketing this as a selling point at the moment is Stanchart, called MortgageOne account, but it is only available for private property loans, not applicable to HDB.

The concept is simple.  The bank will pay you the same interest rate as your mortgage rate, on two-thirds of the deposits that you park in this MortgageOne account, capped at your outstanding mortgage loan.  The deposit interests earned will automatically be used to offset against the interest on your mortgage loan with any excess going towards reducing your principle.

interest offset mortgage account with stanchart

To illustrate with an example above, for someone who choose to loan $600,000 even though he has cash savings on hand of half of this amount $300,000, after interest offset the total mortgage interest costs is reduced by 35%!

Technically what this also means is that suppose you have $750,000 cash to invest in a small studio apartment in a new launch condo, instead of paying down using your own cash, you could just put down 20% deposit or $150,000 and park the rest of $600,000 in a MortgageOne account and the use the loan of $600,000 to pay progressively over time.  As the bank pays you the same interest rate as your loan for up to 2/3 of your deposits, you are effectively borrowing and paying interest on $200,000 (1/3).

This feature is good for those who values liquidity and wish to park his funds while waiting for the right investment opportunity to show up like the next market crash!  It is also useful for those making major career changes in life and wish to apply for the maximum loan possible while still having drawing a high income but with no use for such big loan yet.

Other banks do offer similar feature as Stanchart’s MortgageOne but the loan may come at a higher interest rate than their normal packages which will not be wise.

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(b)  Priority Banking

If you are a private banking customer your bank will likely offer you some special mortgage rates provided they have consumer banking business in Singapore.  Otherwise you may also want to consider joining Priority Banking (PB) of some banks who offer preferential mortgage interest rate to their PB customers.  One good example here is ANZ in Singapore which currently offers a 10 basis point advantage to their PB customers over their public rate of Combo (ave of 3-month sibor and sor) + 1.05%.  PB customers’ spread is 0.95% instead of 1.05%.

Incidentally it makes a lot of sense to park some of your funds in foreign banks like ANZ, Maybank, CIMB, etc. which have consistently paid out much higher time deposit rates compared to local banks.  This is because foreign banks, with fewer branches and limited access to market, need to attract more “sticky” deposits for their funding needs instead of just relying on interbank money market.

If you also work in financial district or CBD area one added perk here will be the exclusive use of PB lounges during lunch hour coffee breaks.

(c)   Free Switching Of Sibor Period

There is only one bank, Citibank, which offers customers unlimited and free switching between the various sibor interest periods from 1, 3, 6, 12 months anytime during the term of the loan.  How is this important feature for some?

The interest period simply means how often your loan interest is set or determined.  Though the sibor rates fluctuates daily in the interbank market, if you are on say 3-month sibor, once your rate is set it will be valid for the next 3 months before it gets reset again, notwithstanding daily fluctuations in the 3-month sibor rate.

In the interbank market, the 1-month sibor rate is always lower than 3-month which is lower than 6-month and so on.  It always costs more to lend to someone for a longer period just like the bank will have to pay you a higher rate when you “lend” to them your funds for a 12-month fixed deposits as opposed to a 3-month.

Due to this incremental spread in interests, it will seem logical for one to always opt for the shortest period of 1-month sibor as at any one point in time this will be the lowest rate.  The tradeoff is your rate gets reset every month instead of say every 3-month which means it becomes more elastic or responsive to any interest rate movements.  We think that in event of an interest rate hike over time, the net effect will be more or less the same as although your 3-month sibor is “fixed” for next 3 month, it will be reset or adjusted more in the next cycle.

Maybe the only slight advantage free switching between interest periods offers is that in event interest rate goes up too quickly in short span of time, one can opt to switch from a 1-month to 12-month sibor (slightly higher by 20 basis point) and hence “lock in” the interest rate for the next 1 year like a fixed rate loan.

(d)  POSB 8-Yr CPF Cap For HDB Loans

Available only for HDB mortgages, POSB has been aggressively marketing this special “hybrid” product where it is fundamentally a floating rate package at FHR (Fixed Deposit Home Loan Rate) currently at around 0.40% plus a spread of 1.48% which comes to 1.88%p.a.  This spread is high compared to most banks’ promotional interest rate spread of 0.85-1.05% and even the longer term spread of usually 1.25% after 3 years.

The attractiveness of this loan lies in its “fixed” component where it caps the interest rate at the CPF ordinary account rate currently at 2.5% p.a. up to the first 8 years of the loan which is a long time.  And that is quite a safeguard against spiralling interbank rates as CPF rate is known to be stable and inelastic to market.  The Singapore government will not want to raise this rate frivolously as it means raising their costs of funds.

This feature is good for those who do not mind paying a slightly higher rate than market (by 50 basis points when compared to floating rate promotions now at around 1.2-1.3% p.a.) in return for that peace of mind.  The final rate at 1.88% p.a. is still lower than the current fixed rate package of 2.18% p.a. with the longest fixed rate period of 5 years.  In a way this is like a middle-of-the-road option between fixed and floating.

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(e)   DBS Multiplier Account  

Lastly in recent years banks have started to bundle their products together to increase the “stickiness” of customers to the bank.  DBS is the first to start offering is in the form of a DBS Multiplier Account – an account that pays you above deposit interest that is way above market for up to first $50,000.  This interest can range from 0.98% t0 2.08% p.a. and is determined based on the “monthly cash flow”, a measure on how much business or activity you do with the bank, comprising the sum of four components – monthly salary credited into a DBS/POSB account, total monthly spend on the banks’ credit cards, monthly mortgage instalment with the bank, and total monthly investment dividends going into a DBS/POSB account.

Besides DBS, OCBC is the next and only other bank at the moment to offer such an account which pays much higher interest (up to 3%) based on total relationship with the bank called the 360 account. However for OCBC the cash flow measures are slightly different and mortgage instalment is not one of them.

For those with existing relationship with DBS and would like to earn higher deposits interest on their spare cash, provided DBS mortgage interest rate is not too far away from the next best in the market, it does make some sense to consolidate your business to DBS, or any bank that comes up with product bundling strategy later on.

Consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.

 

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How To Select Home Loan – Loan Restrictions

Loan Restrictions

After deciding what kind of interest rate package suits you best especially between fixed or floating rate, we look at step 2 of the 5-step review process in selecting a home loan, ie. loan restrictions.

To recap the 5 steps are:

  1. Interest Rate
  2. Loan Restrictions (eg. lock-in period, prepayment penalty etc.)
  3. Loan Features (eg. interest offset account, switching between sibor periods etc)?
  4. Relationship with the bank
  5. Tenure and Loan-to-Value

Besides interest rate, loan restrictions such as lock-in period could be the next most important factor to assess in deciding on a housing loan.  What is lock-period and what are some of the other common or hidden factors to watch out for?

 

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(a)  Lock-in Period

As the name implies, the lock-in period is the period where the borrower is “locked in” with the bank as he enjoys a special promotional interest rate usually in the initial few years of the loan as covered in step 1.  This period can be anywhere between 1 to as long as 5 years depending on whether it is a fixed or floating rate package.  The borrower trades off his right to switch to another bank during this period in return for the better rate offered.  In the case of sibor-based loans the spread that the bank charges is typically lower by at least 30 basis points during the lock-in period from 1.25% down to 0.95% or lower.  Should the borrower be forced to redeem his loan in full during the lock-in period for example in the case of sale of property, the bank usually levies a penalty of 1.5% on the loan amount redeemed which can easily run up to $10,000 or more for an outstanding loan of $700,000, which wipes out all the savings from the promotional interest.

How do you decide if you should go for lock-in?  As a general rule, if you opt for fixed rate package in Step 1, it normally comes with a lock-in period matching that of the period where the interest rate stays fixed.  Such lock-in is fine and fair given the stability of a fixed monthly repayment that comes with fixed rate for the period.  If interest rate rises too quickly by the time the fixed rate period is over, you can easily refinance your loan again as the lock-in period would also have expired.

The merit of locking in for a floating rate package is not as clear.  This is especially so in the current environment where most expect rates to creep up in the next few years.  If the rate hike turns out to be too soon and too fast, the “promotional rate” you enjoy on your loan could turn out to be less beneficial and you will not be able to switch to a fixed rate loan should you be locked in for too long a period.  Ceteris paribus it will be safer to go for a floating rate package without a lock-in even if the promotional rates are a few shades higher than the best available rate.

More importantly when it comes to lock-in period, you must be certain that you are not going to sell your property anytime soon, at least not within the next few years because of the penalty as explained earlier.  Hence most people will be more comfortable committing to a lock-in period for a loan where it is for the “roof over their head”, as opposed to an investment property which is more susceptible to business cycles.

In the past one or two banks do provide for waiver of this penalty in event of a sale of property but you need to be careful to sight this clause in the loan contract as promised, as it varies from time to time and is by and large not a permanent loan feature in Singapore.

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(b)  Partial Prepayment Penalty 

No one likes to be heavily indebted and hence whenever you get a windfall say some extra bonus at the end of the year you will want the flexibility to pay down on your loan outstanding and hence reduce your total interest costs over time.  You can appreciate why then this is also an important feature to establish for your loan.

As a general rule, loans that come with a lock-in period attract a penalty whenever you try to redeem in full or even pay down in partial.  As explained this prepayment penalty is usually 1.5% on the loan amount redeemed which of course then wipes out some of the interest savings you wanted to achieve from paying down portion of the loan.

Some banks do allow for paying down of up to 20% of the loan without a penalty even with a lock-in period promotional rate.  For those refinancing, note that some banks might also require that you to keep a certain minimum loan amount after partial repayment for example $200,000.  Check with an experienced mortgage broker who will be able to list out for you all the loan restrictions in a chart format for easy comparison.

(c)   Re-pricing Admin Fee

Another factor which is of lesser significance to consider is the re-pricing admin fee.

First what is re-pricing?  It simply means going back to your current bank (for those with existing mortgage for refinancing) and ask to switch over to another loan package after the expiry of your lock-in period if any.  The bank usually has a specialized department that handles all re-pricing requests.  They will gladly offer you any of their existing packages for new customers but subject to an admin fee which from our knowledge can vary greatly between $200 to $800.  Most of the local banks will charge $800 for re-pricing.   Incidentally CIMB charge only $200 for re-pricing.

How important is this a factor in your consideration depends on how likely you think you are going to stay with the same bank for personal reasons.   But remember re-pricing happens only a few years down the road and the admin fee might also be revised upwards by then (used to be $500 for local banks in the past).  For most people this may not be a salient factor as refinancing to another bank altogether not only ensures you get the best rate but many banks still provide legal subsidy which covers all the costs involved and makes it cheaper than re-pricing with the same bank ironically.

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(d)  Breakage Fee

The last 3 fees are not so much factors of consideration when choosing a loan, but more to know… starting with breakage fee.

Nowadays most people are on market-pegged loans of 3-month sibor or sor.  What this means is that the your interest charged is set or determined every 3 month and will not change in the ensuing 3-month “interest period” even though the sibor rates in the money market actually fluctuates daily.  The implication here to you is that if you should want to do a partial or full repayment of your loan, you need to effect that exactly on the expiry date of this “interest period” which happens every 3 months.  If you fail to do so for example some borrowers forget to negotiate that during the sale of the property and ends up redeeming his loan in full on completion date which falls outside the expiry date, you may be charged what is termed as a breakage fee of 0.5% (depends on the bank) on loan amount redeemed.

(e)   Cancellation Fee

Cancellation fee is levied where one cancels the loan even before it is disbursed.  This is usually around 1.5% on the amount cancelled.  It is usually not a factor of consideration as hardly anyone cancels after signing the loan offer document.  Also even if you do change your mind after signing on the dotted line, you can always wait for your loan to be disbursed and then arrange for refinancing provided there is no lock-in period.

However cancellation does come into play for loan on property under construction where there is progressive disbursement of the loan.  In some cases where buyers decide to switch over to another bank’s package just before TOP due to some aggressive pricing or incentives they must be more than prepared to pay 1.5% cancellation fee on the 40% loan yet to be disbursed.

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(f)    Legal Fee Subsidy Clawback

Lastly there is the legal fee subsidy clawback for refinancing cases where the borrower will need to refund the initial legal fee subsidy (usually capped at $2000) paid for by the bank at the outset if he choose to move his loan again within 3 years of refinancing it.  That is the reason why we always look at the average interest rate in the first 3 years of the loan as beyond that there is usually no more lock-in nor legal fee clawback.

Consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there. See their testimonials.

 

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How To Select Home Loan – Interest Rate

Interest Rate

There are 13 banks and 2 finance companies in Singapore that provide mortgage loans to customers.  It will certainly be a frustrating experience trying to call all of them and then figure out which one is the best for you especially when they come with different features besides pricing.  What are some important factors to consider when one selects a mortgage?

Broadly-speaking there are 5 areas to look at and in a five-part series we like to cover them one by one starting with this article which explores the number one factor for most people – interest rate.

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Before we start let us first summarize the 5 factors of considerations in choosing a loan.  They are :

  1. Interest Rate Structure
  2. Restrictions (eg. lock-in period, prepayment penalty etc.)
  3. Any special features (eg. interest offset account, switching between sibor periods etc)?
  4. Tenure & Loan-To-Value
  5. Relationship with the bank & one’s credit standing

Let’s begin.  As we have said earlier by and large interest rate is the single most important factor customers will look at when choosing a home loan.  And when it comes to interest rate you have to further look into how it is structured and there are a few aspects which will be spelt out clearly in the loan offer document.

a)      Promotional rate VS Long-term rate

Typically the bank will offer a lower spread (eg. +0.85% to +1.0%) hence a lower rate in the first three years of the loan, sometimes even up to first five years for sizeable loans.  After this “promotional period” most banks will then revert the spread back to a higher “long-term” rate (typically +1.25%) which then applies throughout the rest of the remaining tenure.  However there are 2 banks in the market that buck this trend and offer to hold this “promotional” rate all through to the end of the loan tenure.  That is certainly a big factor to weigh in your deliberation as it effectively saves you the trouble of having to refinance after the end of each promotional rate period or every 3 years.

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b)      Floating rate VS Fixed rate

Next you also have to look the pros and cons between going for a floating rate package as opposed to a fixed rate.  Most banks are not very keen to do a fixed rate lock-in at the moment with rates expected to rise over the next few years as the global economy recovers.  Frankly this is more of an art than science – to try and determine when rates will eventually rise and how fast that will be.  The debate goes on at every level and even within US Fed’s FOMC meetings.  There is no right or wrong answer and a lot depends on your own outlook on interest rate.  Follow our blog post here as we bring you the latest scoops.

It may be worth mentioning that at present moment the gap between the lowest fixed rate package at 1.48%p.a. and the best floating rate packages at around 1.2%p.a. is only 30 basis points which will not make too much of a difference to your monthly instalment.  For example on a typical $800,000 outstanding housing loan balance for refinancing over a period of say 20 years, the difference between the 2 instalments of $3860-$3750 works out to only $110 per month or around 3% more.  Hence it may be worth switching to a fixed rate loan for the next 3 years for that peace of mind.

c)      Market-pegged VS Board-pegged

How about which benchmark to peg your loan interest on?  In Singapore, most banks offer only 2 benchmarks – money market indices (usually 3-month sibor or sor) or the bank’s own internal board rate for residential property.  Usually the bank adds a markup as their profit, also known as a spread, over this 3-month sibor, or likewise subtracts a margin from its board rate, which then forms the final rate. Over the last 5 years, most customers prefer a more transparent benchmark like 3-month sibor rather than board rates which is subject to the idiosyncrasies of the bank.  Albeit most bankers will tell you their board rate has proven to be stable and has not moved an inch in the last 5 years.  Still that was only in the last 5 years since 2008 where rates were generally ultra-low.  There is a perception in the market that banks will be slow to reduce their board rate but quick to adjust upwards when money market rates start to move.

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DBS has recently introduced a new and first-of-its-kind peg called the FHR – Fixed Deposit Home Rate.  The bank defines this as the average of the bank’s published 12-month and 24-month Singapore dollar time deposits rate which currently hovers at around 0.40% similar to your 3-month sibor rate.  So far the market seems to have received the FHR quite well going by early results on its loan books.  Here at MortgageWise, we think FHR may be more stable and any future increases in FHR will lag behind sibor and sor for the simple reason that fixed deposit rates form the cost of funds to the bank especially for DBS with a huge deposit base they will be slow to increase their cost of funds.

Watch this space for the next few write-ups on what else to consider in choosing the best loan package for yourself.

Alternatively, consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.

 

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Fed Still Unsure Of Labour Market Recovery

Interest Rate Outlook

Financial markets watch closely for signs in latest Janet Yellen’s speech that she delivered at the Fed’s annual economic policy conference in Jackson Hole yesterday in the State of Wyoming (mid-western state above Utah and Colorado) but still leave much for interpretation at the end.

Here at MortgageWise we do track closely as well every event that comes out from US Fed Reserve knowing full well how any movements in interest rate will be pre-cursor to Singapore’s mortgage benchmark rate which is effectively a laggard.

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Our reading here is that Yellen seems to be taken a path back to the middle even after sterling economic data last month (of a Q2 GDP growth of 4%) which all but has most analysts believing a much earlier rate hike from mid-2015 to somewhere early part of the year.

The key points of her speech are as follows :

  • She acknowledges the difficulties in deciphering between structural changes or cyclical factors causing what is still a poorly functioning labour market even 5 years after the Great Recession.
  • Certain slack in the labour market like the low participation rate and the high no of involuntary part-time work are not captured in the official unemployment rate which has dropped to 6.1% in an unexpectedly fast pace.
  • In particular this is the first time she argues at length for the possibility of structural forces at work causing such slack
  • One good example is the structural shift of the US economy away from goods production to the services sector which has traditionally seen higher proportions of part-time jobs.  So it becomes harder to discern how much in the rise of involuntary part-time work is coming from such structural changes.
  • Hence being unsure of the forces at play it will be more prudent for Fed to maintain its easy policy for a while to address concerns of long-term unemployment and a low market participation rate.
  • Overall she does appease more of the doves who wants the central bank to maintain its current easy policy, while re-iterating it will not hesitate to start rate hikes before it leads to inflation.

We think that the latest from Fed does not change the view that the 1st interest rate hike will come likely in the middle of 2015.  A lot is still unclear with the new geopolitical tensions rising in middle east as well as Ukraine with EU countries already registering slower growth in Q2 (Germany slip into negative 0.2% growth in GDP, France is flat while Italy contraction widens to negative 0.2%).

Some believe that if the slowdown in EU continues it will definitely hit US sooner or later.

 

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Why You Must Sell Now

Why Some Owners Should Seriously Sell One Property Now

On refinancing I have noticed lately after speaking with some clients how most of them still do not see the real impact of TDSR especially when interest rate “normalize” later (historically in last 20 years 3-month Sibor has been hovering at 4%).  The super and protracted low rate environment of the past 5 years is more an anomaly and most people forget that.

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To illustrate let’s look at the case of Mr Soh (not his real name), a businessman for the last 20 years.

He has 3 properties which he has bought over the years with 3 outstanding mortgages as follows :

PropertyStatusLoan OutstandingOriginal TenureNo of yrs leftCurrent interestMthly Instalmt
Semi-DCurrent Residence$704,00030151.2%p.a.$4200
RivergateRented at $8K pm$1,645,00030251.2%p.a.$6300
Marina Bay ResidencesRented at $10K pm$1,236,00035311.6%p.a.$4300

Mr Soh now 50 years old has bought his landed property 15 years ago and the 2 investment properties were picked up at more recent times at good prices during the Great Recession period in 2009 and 2010.

Back then most banks were left pretty much to themselves to decide how much debt servicing ratio they would accept as “credit-worthy” (mostly in the region of 40-45%) and since by then Mr Soh’s business is earning him a stable income declared as around $20,000 per month, he is deemed good for each of the loan where he applied for up to 80% loan-to-value on the purchase price of the property as each of his instalment was way below the 45% (or $9000) ratio of his monthly income.

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However now we have Total Debt Servicing Ratio (TDSR) which is a big game changer for most people beyond what they realize including Mr Soh.  Banks will now need to look at his entire debt servicing ratio of all his property loans, plus all other debts like car loan and revolving credit if any.  Luckily for Mr Soh he has no other debt besides mortgages as his BMW 7 series and his wife’s Mercedes E class have both been fully paid for.

Let’s look at the impact of TDSR now when he tries to refinance his loan on Marina Bay Residences (MBR) which just got reverted to the higher interest of 1.6% p.a. after 3 years.

Mr Soh draws a fixed gross salary of $10,000 every month from his company, and the rest in director’s fees.  His income for the latest assessment year were as follows :

Employment Income                      = $120,000
Director’s Fees                                  = $60,000
Rental Income (50% share)          = $108,000

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Under the new TDSR framework all variable income needs to undergo a 30% haircut so that will be applied to both his director’s fees and rental income, hence total “qualified income” per month for mortgage application will be =

$120,000 + ($60,000+$108,000) x 70% = $237,600 per annum or $19,800 per month

To refinance his current loan for MBR unit at the best floating rate today of 1.2% p.a. based on his current outstanding of $1.236M, his new tenure can only be 25 years because of his age which will result in a new monthly instalment of $4800.

His Total Debt Servicing per month will now stand at $4200 (Semi-D) +$6300 (Rivergate) +$4800 (MBR) = $15,300.

This will form 77% of his qualified monthly income of $19,800 which means he WILL NOT BE ABLE TO REFINANCE this loan.  He needs to keep his total debt repayments to below 60% of his qualified monthly income of $19,800, ie. below $11,880.

MAS has rightly anticipated the likely plight of many such owners like Mr Soh and has introduced some concessions early this year on 10 Feb 2014 where it allows exemption from TDSR for refinancing cases but only for owner-occupied homes.  Investors who fail to meet TDSR when refinancing one of their investment properties will need to agree with their bank for some debt reduction or paying down of outstanding loan until TDSR 60% is achieved before they could refinance.

Even with the official concession, not all banks will make the exception for owner-occupied homes as MAS leaves it largely to the banks to assess on credit rating and from we know some banks still will not refinance owner-occupied properties for TDSR above 60%.  Be warned.

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What can Mr Soh do now?

Clearly that means he has to sell one of his property to “free up” some quota for TDSR.  So what Mr Soh can do is to consider selling his Rivergate in this case where he bought at around $1600psf back in 2009 and he could still fetch a decent profit at $2000-2100psf even in today’s buyer’s market.  This would then allow him to refinance his loan for MBR as his TDSR will then drop below 60% TDSR to 45% ($4200+$4800 divide by $19,800).

Another strong reason for Mr Soh to do that is also the huge outstanding loan of Rivergate at $1.6M which will drain his cashflow substantially if interest rises up too quickly in the next few years which if he were to sell by then it might be too late as the market may have corrected substantially (inverse to interest rate) and wiped out some if not all his profits above $1600psf.

It is imperative for Mr Soh, and many other owners who have yet to do so especially those with more than 2 properties, to quickly take stock of his TDSR position and determine which property to cash out sooner than later.  Doing so not only ensures maximum profit for owners, but more importantly, allow them to refinance their other mortgages in time to come when interest rises.

 

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US Economy Powers Ahead In Quarter 2

Interest Rate Outlook

Last week the market was spooked by the strong GDP growth of 4% in US in the 2nd quarter when most analysts were expecting it to be in the region of 3%.  Stock markets were sold down on fears of sooner than later rate hikes in the subsequent days. Here’s a summary of all that you need to know :

  • Consumer and business spending led broad-based gains in 2nd quarter GDP with the former (which is 70% of US economy) advancing at 2.5% double the pace in Q1.
  • In terms of job growth US employers have been adding more than 200,000 jobs for five straight months and the latest figures in June should see that trend continued.
  • Job growth has also been accompanied by wage increases with inflation-adjusted disposable income up 2.4% on year which is the best annual gain since late 2012.
  • Indeed unemployment in June is now down to 6.1%.  For months Fed has been saying the jobless rate remains elevated but it dropped that reference this time.
  • Officials also noted inflation which has been running below 2% for years is now closer to the target (2%) and risk of deflation is diminishing.
  • Following 2 days of FOMC’s meeting, tapering continued with reduction in bond purchases down from US$35b to US$25b per month, on track to end after October.
  • Not surprising US bond yields jump by the biggest amount since Nov 2013 with the US 10-year Treasury note ending the week at 2.556%
  • Fed Res chairman Janet Yellen’s sums up the latest assessment of the US economy with “Labor market conditions improved, with unemployment rate declining further.”
  • The US economy appears to be on track to register continued gains in the 2nd half of 2014 as the growth momentum carries through.

Debate is now on the timing of the 1st interest rate hike which is now generally expected to happen in Q2 2015 instead of the earlier mid-2015, albeit Yellen has again repeated in Fed policy statement that they will wait a “considerable time” after bond purchases end before raising rates.   PS. See the lowest rates available for Fixed Rate Home Loan now, for complete peace-of-mind.

 

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Income-Weighted Average Age

Mortgage Loan Tenure Now Affected By Income-Weighted Average Age?

Refinancing one’s home loan every 3-4 years has become such a norm for some people in Singapore that Mr. Lee was caught off-guard recently when he was told by his bank that his monthly instalment will go up by 27% if he decides to proceed with the refinancing even though he got a better interest rate and he has been steadily paying down his outstanding loan with his current bank in the last few years.

What happens here is this new requirement called the Income-Weighted Average Age that all financial institutions will need to comply with since the TDSR (Total Debt Servicing Ratio) was introduced in Singapore 29 June 2013 last year.

 

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To understand this better, let’s take a closer look at how it affects Mr Lee’s case in particular.

Mr Lee is 55 years old this year.  When he took up his current loan ($800K in 2011) to buy an investment property he was then 52, with his wife as joint-owner cum borrower who is 12 years his junior at 40 years of age.  At a floating interest of only 1.2% for the last few years, his monthly repayment has hover around $2600.

However as the interest reverts to a higher rate from this year, he decides to go shopping for another bank to refinance the loan, after all the prevailing floating rate is still low at around 1.3% and he reckons that he would be able to keep to more or less the same monthly repayment.  Mr Lee draws a high monthly gross employment income of $15,000 and would have no problem meeting the TDSR of 60% on his 2 existing mortgages and a car loan.  His wife has been a housewife with no income other than 50% of the rental income she received from this investment property which is now rented out at $3600 per month.

To Mr Lee’s surprise, the new bank has come back with a monthly instalment of almost $3500, 35% higher and would about wipe out all his rental income towards repayment.

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When Mr Lee first apply for his loan in 2011, the bank has conveniently used the age of the younger applicant, in this case his wife at 40, to determine what is the maximum tenure allowed. Most banks in Singapore cap this to the age of 75 years old where one must finish paying off the loan.  For Mr Lee, using his wife’s age, they are technically allowed up to take up 75-40 or 35 years loan tenure but he opted for 30 years instead.

Loan                                  = $800,000
Tenure                              = 30 years
Interest                              = 1.2% p.a.
Monthly Repayment        = $2,648

However when he submits the application for refinancing this year, the new bank is required to use Income-Weighted Average Age to compute the tenure.

Monthly Income for Mr Lee= $15,000 + 70% x $1,800      (haircut of 30% for rental income)
= $16,260
Monthly Income for Mrs Lee= 70% x $1,800
= $1,260
Total Monthly Income= $17,520
Income-weighted Ave Age= [16260 / 17520 x 55yrs old] + [1260 / 17520 x 43yrs old]
= 51.04 + 3.09
= 55     (rounded up)

Using this age to compute the maximum tenure, the Lees are only allowed maximum of 75-55 or 20 years which affects his loan as follows :

Outstanding loan to refinance    = $732,321
Tenure                                             = 20
Interest                                            = 1.3% p.a.
Monthly Repayment                     = $3,466

This new instalment almost takes up his entire rental income of $3600 and Mr Lee has to keep his fingers crossed that interest stays low for a longer period and rentals would bottom out soon, otherwise he would soon find himself in negative cash flow when it comes to rentals albeit he will be paying down his loan much quicker in 21 years from now and hence lesser interest overall.

Still he may decide not to refinance as yet until such time when interest rate spirals out of control in order to keep his monthly instalment manageable.

In conclusion, the income-weighted average age requirement affects the most joint-borrowers with a significant age gap and those who took a much longer tenure in their first loan to begin with, eg. above 30 years.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there. See their testimonials.

 

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Refinancing And TDSR

Refinancing Your Home Loan – How Does TDSR Affect You Now?

TDSR or Total Debt Servicing Ratio (currently at 60%) has been introduced in Singapore since 29 June last year in 2013, but still many doubts remain in the minds of home owners as to how it works when it comes to refinancing of one’s existing home loan.

And since TDSR is a structural framework that governs how banks give out loans in Singapore and which will not be lifted even when prices go down later (or up), I thought it will be useful to understand the few immediate implications of this new TDSR rule on refinancing.

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What is TDSR?

First we need to know the concept of TDSR which is simple.  In the past when someone applies for a home loan (or refinance one), the bank looks at only the debt servicing ratio of the applicant (usually in the 45% region) based on that one loan per se, regardless of how many other mortgages or other forms of credit he may already have to service every month.  You can see how that may be unsound as the same person could technically apply to 3 different banks for 3 different mortgages and have his total monthly instalments more than his total monthly income, so long as the banks deemed his credit profile and payment history to be good.  However should things go awry later for example one loses his job or could not find tenants with good rent to help defray his monthly mortgages, one gets into a distressed situation especially when interest rate soars.

This is the exact scenario that MAS wants to circumvent.  Hence the new TDSR rule requires that all banks check and verify that the total debt undertaken by a borrower in terms of his monthly repayment cannot exceed 60% of his income.  Kudos to the central bank which also take the opportunity to straighten out the rules governing loan application across the board so that there is uniformity in the process and no one bank is allowed to “cheat” and make certain concessions to a borrower in order to get his business.  Some of these new rules are :

  • All variable income cannot be taken into consideration in full and must undergo a haircut of 30%.  This covers rental income, bonuses, director’s fees etc
  • Banks can no longer use their own “internal” interest rate (which differs from bank to bank) when they calculate TDSR or how much loan one is eligible up to, but a specific medium term rate at 3.5% for all residential mortgages or 4.5% for non-residential.
  • When there are more than 1 borrower (which is usually the case for husband and wife), no longer can the bank decides freely to use the younger age to determine the maximum tenure.  Instead all banks are required to use an income-weighted age for this purpose which immediately reduces the maximum tenure allowed for some people (most banks do not cross 75years old)

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New Purchase VS Refinancing

Logically speaking those with only one mortgage should not bust the 60% TDSR limit as most banks were using 45% debt-to-income ratio prior to TSDR regime, hence there is still some leeway of 15% to cater for the other loans or credit facilities like monthly repayment for car loan etc.

Those borrowers with more than 1 loan are more likely to be affected by TDSR.  They may have already “overstretched” themselves in the eyes of MAS going above 60% of their income when you aggregate the total monthly repayment across all the different loans.  Or worst still for some people who may now have retired and will no longer have any “proof of income” except for the rentals they are collecting every month which undergoes a 30% haircut.  With a much reduced income they may be way past 60% even though their outstanding loans may have been paid down steadily over the years.  Imagine what happens when interest rate creeps up and their monthly instalment goes up further?

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And that is the exact reason behind the concession introduced by MAS in a subsequent notice this year on 10 Feb when they broadened the exemption of TDSR as follows :

  • Owners who breach TDSR 60% but wish to re-finance the loan on the property that they live in can do so as long as that is a property purchased before TDSR came into play (29 Jun 2013).  By the same token the MSR or Mortgage Servicing Ratio (at 30%) which applies to HDB market, will also be lifted for refinancing of HDB loans as long owners have bought their HDB before the various MSR implementation dates (12 Jan 2013 and 10 Dec 2013 for ECs)
  • For such owner-occupied homes, those who got an earlier loan tenure of more than 30 or 35 years for HDB and private property respectively can still keep to the same original length of tenure calculated from the start of their 1st loan that they are trying to re-finance.
  • However for all investment properties, MAS only allow a grace period of 4 years up to 30 Jun 2017 for re-financing despite breaching TDSR 60% provided 2 conditions are met :

–          The investment property is purchased before 29 Jun 2013

–       The borrower must agree to a debt reduction plan with the new bank who refinanced the loan (subject to bank’s credit approval)

After 30 Jun 2017 there will be no concession allowed on TDSR requirement when it comes to investment properties.

I hope reading this article has helped some of you to understand your situation better when it comes to refinancing of your existing loans in the post-TDSR era.  If you should have more questions for us do not hesitate to call and we are more than glad to be able to shed light on your situation and propose the best course of action, especially when interest is set to rise by early 2015.  Take action now.

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Singapore Property Market 1st Half 2014

Last week URA released the final statistics for the property market in Q2 which allows us to compute the overall picture for 1st half of 2014 as follows :

Ppty IndexOverall MarketCore Central (CCR)Rest of Central(RCR)Outside Central(OCR)
2014 Q2-1.0%-1.5%-0.4%-0.9%
2014 Q1-1.3%-1.1%-3.3%-0.1%
2014 1H Total-2.3%-2.6%-3.7%-1.0%

Click here to see how this looks like graphically.

 

Last week the Monetary Authority of Singapore (MAS) Managing Director Mr Ravi Menon also re-iterated the official stance that it’s still too early to ease property cooling measures.  And in an insightful statement given by Mr Menon, he has perhaps given the market a clue (to the timing of policy loosening) when he said property prices have risen 60 per cent over the last four years but have declined by just 3.3 per cent over the last three quarters.  He also said the relaxing property measures at a time of low interest rates may set off another spiral of price increases.

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Could Mr Menon be alluding to a double-digit decline in the magnitude of 15-20% before government will relax the rules? Possibly.  Putting it all together I think it will be a case of whichever happens first – when interest starts to rise for a while (eg. from current 1.5% to 3%) or when the decline gets worst, or when both events happen at the same time.

Understand that the figures quoted is based on an index movement – a much “blended” measurement across hundreds of property transactions in the whole island of Singapore.  Which also means the effect on individual condos you are looking at could be a lot more than you think.  To prove my point, I have crunched the caveats from URA website using 3 condos that investors are most familiar with to represent a precinct.  I will look at 5 precincts in the prime District 9/10/11 plus 5 other famous condos in the outskirts.

 

PrecinctRepresentative CondosHighest PSFAve PSF 2014 1HAve PSF 2013 2HPrice ChangeRental 2014Q2Rental 2013Q4Price Change
Orchard RoadArdmore Park*$3,016$3,016$3,467-13.0%$5.78$5.780.0%
Four Seasons Pk*$2,743$2,533$2,630-3.7%$4.20$4.87-13.6%
Orchard Res (ION)*$4,047$3,899$4,312-9.6%$7.25
Robertson QuayRivergate$2,198$2,091$2,0790.6%$5.29$5.084.2%
Cosmopolitan*$2,068$1,995$2,072-3.7%$5.18$5.26-1.5%
Aspen Heights*$1,647$1,520$1,604-5.2%$3.93$3.852.0%
NovenaPark Infinia*$1,898$1,797$1,952-7.9%$5.12$5.47-6.4%
Viva*
Soleil@Sinaran*$2,191$2,084$1,9805.3%$5.92$5.556.6%
Marina BayThe Sail$2,708$2,209$2,2000.4%$6.02$6.19-2.8%
Marina Bay Res*$3,923$2,778$3,092-10.2%$6.07$6.33-4.1%
Marina Bay Suites*$2,787$2,754$2,7510.1%$4.09$4.76-14.0%
Sentosa/KeppelOceanfront*$1,617$1,617$1,711-5.5%$4.09$4.44-7.9%
BerthByTheCove*$1,618$1,603$1,608-0.3%$4.36$4.85-10.0%
Caribbean$1,738$1,548$1,634-5.3%$5.29$5.63-6.0%
Outside CentralCostal Del Sol$1,453$1,328$1,3012.1%$3.62$3.620.1%
Kovan Melody$1,239$1,116$1,211-7.8%$3.62$3.78-4.4%
Grandeur 8$1,115$1,045$1,094-4.5%$3.26$3.38-3.4%
One-North Res$1,697$1,368$1,505-9.1%$4.65$4.91-5.3%
The Parc Condo*$1,327$1,258$1,14410.0%$3.49$3.53-1.1%

Note:
Condos selected are those fairly new (less than 10yrs old) with huge no of total units (for liquidity)
Those marked with * are condos with less than 5 transactions in the 6-month period which may skew the reading and analysis.
Rental prices are in psf per month taken from actual contracts lodged by IRAS and compiled by URA  

 

With the exception of a few, the general trend over the past 6 months since Dec 2013 has been a decline in the region of 3-8% at most condos.  The decline is even more pronounced at the luxury segment of orchard road properties of around 10% I reckon.   For the outside central region, with the exception of The Parc Condominium bucking the trend with a 10% growth (Costa Del Sol can be considered flat with an insignificant  2% change), the general decline is also at the high single digits of 5-10%.

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The official property index changes in the same 6-month period may show only a 2-3% drop but when you look at the caveats of individual condos the fall can be 2-3 times greater in absolute percentage terms, which is what most buyers will notice and conclude as well.

On rentals comparing 2014 Q2 data with that of 2013 Q4 over another 6-month period, the general trend is also down as we all know.  Sentosa Cove fared the worst with all 3 condos declining 8% on average.  A few condos buck the trend like Rivergate and Soleil.

 

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