There is only slightly more than a year to the deadline issued by MAS for refinancing of investment property that many are still not aware of. Whereas there is no end date for exemption of TDSR (Total Debt Servicing Ratio) 60% from refinancing of own-use property as long as the property is bought before 29 Jun 2013, for investment property this exemption expires on 30 Jun 2017 next year. What this means is that after Jun 2017 for those who are still unable to bring their TDSR down to within 60% of their monthly income, they will strictly not be able to refinance home loan for better rates even if they are willing to pay down a small portion of their outstanding loan (currently that is how the exemption works where banks require such investors to pay down 3% of outstanding before taking over).
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Certainly there are implications for those with more than one property especially when there are economic headwinds ahead with more job losses projected this year. Or there may be others who have fluctuating income or looking for a change in work environment soon. Before one makes such a career move, he should take stock of his investment properties and speak to a good mortgage broker who can better advise on the implications of various policies. For example on his investment properties he may be better off on a DMR (Deposit Mortgage Rate) home loan rather than a fixed rate mortgage which always end at a much higher floating spread when the fixed term ends, and that is after June 2017. In this case he should refinance to DMR loan before making any career move that may result in a drop in his monthly income.
There are other things to consider too in terms of mortgage planning for an investment property. One other obvious factor is the need to retain flexibility of selling out whenever a good offer presents itself. Hence going on a fixed rate may or may not be a good idea for such properties. A fixed rate home loan always come with a commitment period or lock-in period during which the borrower will be slapped with a hefty 1.5% penalty (ie. $10,500 on a typical $700,000 loan) if he sells the property and redeems his loan in full. Of course some might argue that this can easily be absorbed into the sale price by negotiating for slightly more. Still depending on the purchase price of the investment property, this is akin to paying another stamp duty on exit which all eats into the investor’s profit.
Investment property differs from own-use property in that there is a steady stream of cash flow from rentals to help defray borrowing costs. In this regard the investor’s main priority is to make sure he manages his cash flow or in other words the “carrying costs” of the property well. There will be less concern on a floating rate interest rate home loan as long as he is able to cover the interest portion of the monthly repayment using his rentals. Indeed he might want to do his own “stress test” to determine at which point beyond which any further interest hikes might render his position untenable.
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Contrast that with an owner-occupied property where a homeowner pays off every cent of his monthly mortgage using his hard-earned income. Surely the main priority here would be to reduce the interest costs and pay off the loan in shortest time possible. There is more reason to go on fixed rate home loan here and do partial repayment before refinancing every time the fixed term ends. There will also be no issue with a lock-in period for own-use property, or refinancing later on should income varies as the TDSR exemption from MAS has no expiry date for owner-occupied home (bought before June 2013).
DBS home loans has new attractive rates for a DMR package with a constant spread which we rate as the best mortgage option for an investment property, or maybe even for owner-occupied homes for some who are looking to sell. Speak to our consultants today for the best home loan Singapore rates.
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