To take or not to take a 50-year home loan

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#1
And the debate goes on!

*For the full article (and yes, it is a long article), kindly do visit the website.

The Straits Times
www.straitstimes.com
Published on Aug 16, 2012
To take or not to take a 50-year home loan


By Esther Teo Property Reporter; Eye on Singapore

UNITED Overseas Bank's (UOB) recent introduction of 50-year housing loans has sparked a debate over whether it will lead to borrowers overextending themselves financially.

National Development Minister Khaw Boon Wan weighed in last week on the loan packages - likely the longest-duration loan in Singapore. He called it a "gimmick" and advised home buyers not to fall for it.

Mr Khaw's concern is a valid one. Taking up a 50-year loan, instead of the usual 30-year one, allows a buyer to pay a smaller monthly loan instalment.

If a borrower takes out a 50-year loan for $800,000 at a flat annual interest rate of 2.5 per cent, he would have to pay about $2,337 monthly for his mortgage, compared with $3,161 if the loan ran for 30 years, according to mortgage comparison website SmartLoans.sg.

The result is that buyers may be tempted to buy a more expensive home than they can really afford, overstretching themselves financially in the process. Meanwhile, the longer repayment period means that a lot more interest is paid over the life of the loan. A borrower taking up a 50-year loan on the terms above would pay $264,000 more in interest than if he had opted for a 30-year loan.

But is the issue necessarily so simple?

Mr Khaw's disapproval is based partly on an assumption that the home buyer services the loan throughout the 50 years of the loan, and therefore incurs a punishing interest payment.

In reality, however, not many borrowers end up doing that. Industry players estimate that more than half of borrowers pay off their home loan before the full term is up.

Some do so when they upgrade to a new property; others make capital repayments midway. Many also refinance their loans after a few years.

Seen in this light, a 50-year loan is a temporary "evil" that young couples and executives put up with as they try to get on the first rung of the property ladder in an era of rising property prices.

Later, as circumstances improve - when incomes go up with career advancements - they can refinance the loan and go for the more traditional 30-year option that incurs less in interest payments.

The problem with this argument, of course, is that it assumes borrowers are prudent and rational, and therefore will plan their property purchases in ways that will save on unnecessary interest payments when they can.

For now, this seems to be the case, judging from the poor take-up rate of 50-year loans so far. Mr Khaw has said this is a "good sign that Singaporeans know we should always be prudent".

But supply has a habit of creating its own demand. Young couples now routinely have to pay at least $1 million for a small freehold private condominium unit, even one located in the suburbs.

Incomes have not risen as quickly as property prices, and you can be sure that at least some will consider taking the soft option of lower monthly instalments when it is made available to them.

If more of them do it on the misplaced assumption that prices can only rise, the practice can slowly get entrenched.

But borrowers could easily get stuck with a 50-year loan if the market crashes. More are likely to end up in negative equity, saddled with loans far larger than the value of their real estate if prices fall fast because less of the principal sum is paid off.

If rates rise as well, some borrowers could well be forced to sell and go bankrupt.

Mr Christopher Tan, chief executive of financial advisory firm Providend, said a 50-year loan could work for an investor if the market goes up but would cause a lot of pain if it heads south instead. It is a very risky move, he added.

"In terms of financial planning, it also doesn't make sense because you are obviously buying something you can't afford. It reflects the mindset of the buyer, and it is unlikely that he will be prudent later and pay off the loan earlier even if his salary increases."

This is why even though product innovation in a free market is usually a good thing as it provides options to customers, the Monetary Authority of Singapore (MAS) has said it is closely monitoring UOB's mortgage product.

The MAS has stepped in to regulate imprudent behaviour in the past. In the mid-1990s, it limited unsecured loans to individuals with salaries of more than $30,000 a year. They could also only borrow no more than two months of their salary. These rules have been relaxed only in recent years.

The authority has also lowered loan-to-value ratios on investment homes to protect investors from overstretching themselves.

But ultimately, the borrower must be responsible for his own welfare and do his sums.

There is nothing wrong with looking for a way to reduce mortgage payments when borrowers are young and cash flow is tight. There is also nothing wrong with banks rolling out new options to meet those needs. In Japan, the creation of 100-year multi-generational mortgage terms allowed for loans to be passed on to children and even grandchildren. But the market eventually collapsed, leaving many financially battered or even wiped out.

Western countries, in comparison, typically stick to 30-year mortgages.

Ultimately, borrowers must know the cost and do their sums accordingly. They must look beyond the short term and take advice from friends and family, and even the National Development Minister if necessary.
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My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
If the interest rate is the same as 30yr loan, I will most happy to take it up. Any idea if there is any interest-only loan in Singapore for Priviate Properties? I will take that too if the interest rate is the same.
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#3
In case you didn't know, 50 year loans are not allowed any more. Maximum loan tenure has been capped at 35 years or till age 65, whichever is sooner.
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#4
"They must look beyond the short term and take advice from friends and family, and even the National Development Minister if necessary."

I find this statement irresponsible. I'd only take advice from pple who have intimate knowledge of the topic at hand AND have my interest at heart. Unfortunately none of the above pple in the statement rings true for me on[/align] the topic of ppty.
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#5
(16-12-2012, 01:16 AM)Muck Wrote: "They must look beyond the short term and take advice from friends and family, and even the National Development Minister if necessary."

I find this statement irresponsible. I'd only take advice from pple who have intimate knowledge of the topic at hand AND have my interest at heart. Unfortunately none of the above pple in the statement rings true for me on[/align] the topic of ppty.

I have a slightly different approach from yours

I will take advice from people who have intimate knowledge of the topic AND have no conflict of interest with me on the topic. Big Grin
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#6
Ahahaha! Yes, I can live with that approach too! Big Grin
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#7
This will mean that:
1. Don't listen to bankers about investments
2. Don't listen to stockbrokers about stocks
3. Don't listen to property agents about properties
4. Don't listen to insurance agents about insurance Smile
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#8
(16-12-2012, 05:52 PM)NTL Wrote: This will mean that:
1. Don't listen to bankers about investments
2. Don't listen to stockbrokers about stocks
3. Don't listen to property agents about properties
4. Don't listen to insurance agents about insurance Smile

and the famous statement from WB

"Never ask a barber if you need a haircut" Big Grin
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#9
Actually, there are always pros and cons in anything. If i am buying a 2nd FH property for collecting rent then it may O. K. to max out the loan period allowed. In fact prolong to next generation is even better so that my rental property is "always' positive cash flow due to very low loan repayment. No?
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#10
(16-12-2012, 10:13 PM)Temperament Wrote: Actually, there are always pros and cons in anything. If i am buying a 2nd FH property for collecting rent then it may O. K. to max out the loan period allowed. In fact prolong to next generation is even better so that my rental property is "always' positive cash flow due to very low loan repayment. No?

If the loan interest is attractively low and I can get higher returns elsewhere, I would borrow to the max. Better to be allowed to repay only the interest.
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