35-year limit set on home loans

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#1
The section in BOLD is simply shocking! Average tenure for home loans is now 29 years?!? And about 45% of new home loans are >30 years? What are people thinking? Huh

The Straits Times
www.straitstimes.com
Published on Oct 06, 2012
35-year limit set on home loans

Curbs on long mortgages to prevent buyers from over-extending

By Rachel Chang

IN A move that took the market by surprise, the Government introduced new measures yesterday designed to cool the property market and stop home buyers from over-extending themselves.

From today, the Monetary Authority of Singapore (MAS) will restrict all home loans to a maximum of 35 years.

Home buyers who take a loan that lasts more than 30 years, or extends past their retirement age of 65, will now have to fork out significantly more in cash.

Such long loans can now only be up to 60 per cent of the property's value if this is the buyer's first mortgage. That means that he must pay 40 per cent of the price upfront, in cash.

If this is his second or more property loan, the loan limit shrinks to just 40 per cent of the property's value.

The new loan limits and rules also apply to home owners who refinance their loans.

Analysts said the moves will affect a broad swathe of property buyers and leave only young buyers under the age of 30 untouched.

In a statement last night, MAS explained that it is acting to curb upward pressure on property prices from the current low interest rates worldwide, and the rapid credit growth driven by the US' latest round of quantitative easing (QE3).

"Monetary conditions worldwide are far from normal," said MAS chairman Tharman Shanmugaratnam, who is also deputy prime minister.

But the current climate of easy credit and low rates will eventually change, he cautioned.

MAS said that this is why it is acting now to prevent prices from spiking beyond sustainable levels, so that the eventual correction "which will hurt borrowers and destabilise our financial system" can be softened, if not avoided.

The central bank also revealed the impact of easy credit on home loans over the last three years.

The average tenure for new home loans has risen from 25 to 29 years and currently, more than 45 per cent of new home loans have tenures exceeding 30 years.

In August, a 50-year home loan offered by the United Overseas Bank (UOB) drew the ire of National Development Minister Khaw Boon Wan, who described it as a "gimmick".

Long-tenure loans, said MAS, cause buyers to over-estimate their financial wherewithal.

A rising property market also gives buyers and lenders "false confidence" that the property can always be sold off for a profit if the loan becomes difficult to service.

Analysts interviewed yesterday do not expect property prices to fall drastically in reaction, but they predicted some buyers will exit the market, transaction volumes will cool and price rises will moderate.

In the third quarter of this year, both Housing Board resale prices and private property prices accelerated their climb.

The board's resale price index grew 2 per cent, outstripping the 1.3 per cent growth in the second quarter, while the private property market rose 0.5 per cent, up from 0.4 per cent in the preceding quarter.

The new changes, said observers, would land hardest on older buyers, especially those with more than one property. Young buyers should get away with just paying a shade more every month.

For example, a 40-year-old buyer can now take a loan of only 25 years if he wants to continue to be able to pay the usual 20 per cent down payment.

But if he were to take out the shorter 25-year loan of $800,000 for a $1 million property, this would now mean monthly payments of $3,051, at current interest rates of 1.1 per cent. This is $400 more than if he had a 30-year loan.

But for a buyer like investor Jack Liang, 49, who is on the hunt for his third property, the new rules mean "game over", he said.

If he finds a $1 million property that he wants, he can take only a 16-year loan, up to the retirement age of 65 years old. His monthly repayments will be $4,546, likely more than its rental yield.

Or, he can take a longer loan, but for only 40 per cent of the property's value, as it is not his only housing loan. He must then have $600,000 cash in hand to purchase the property.

"It's time to pull up the handbrake," he lamented.

rchang@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
I repeat here what I wrote in another post yesterday....

The bankers are nuts to make loans that last over 30 years!, and the banks they work for are fanning the residential property market and prices! So are the more than 45% of those buyers of new residential property who need a loan, just because the banks are willing and interest rates are low.

I much prefer just having a housing loan for 60% of the purchase price and a 15-year tenor, and try to pay it off within 10 years!
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#3
Personally I prefer a loan that allows for interest payment only. Big Grin
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#4
(06-10-2012, 10:12 AM)Share Investor Wrote: Personally I prefer a loan that allows for interest payment only. Big Grin

That sounds like the choice of REITs, most western democracies or companies are doing.

The Spore Gov is been prudent in implementing these new curbs on property loan tenure/quantum. However from another standpoint, while it tries to protect the greedy/bold/reckless from over extending themselves, it also reduces the probability of the prudent/conservative/cautious from been able to profit from the mistakes of the former.
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#5
for the government, the best economy is slow and steady inflation of around 2 - 3% forever.

for the investors, that's the worst of the market to make money.
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#6
35-years iloan is more than enough for speculators, another LPPL .
“risk comes from not knowing what you’re doing.”
I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
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#7
(06-10-2012, 02:33 PM)cfa Wrote: 35-years iloan is more than enough for speculators, another LPPL .

35 year loan applies to those 30 years old and below. Max loan duration is up to 65 years old.
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#8
(06-10-2012, 02:43 PM)Share Investor Wrote:
(06-10-2012, 02:33 PM)cfa Wrote: 35-years iloan is more than enough for speculators, another LPPL .

35 year loan applies to those 30 years old and below. Max loan duration is up to 65 years old.

The important points to note for speculator is not only the duration, but also the maximum loan allowable.

If loan longer than 30 years, the maximum loan allowable is ONLY 60% of property's value

If this is his second or more property loan, which is common among speculator, the loan limit shrinks to just 40% of the property's value.

Less leverage = less attractive yield
short duration = more monthly cash outflow Tongue
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#9
Anyone read the MAS press release?

MAS Restricts Loan Tenure for Residential Properties

It looks like they are finally targeting the group of homeowners in Singapore in their mid-40s to 50s, generally have a paid up first mortgage, has good jobs and are quite cash rich with the capital to get another 2 properties as investments using 20% for the first house and 40% for the 2nd house.

Without these measures the "uncles and aunties" can still take 30-35 year loans, and adding the retirement age kicker will sting hard in terms of significantly increasing the front end costs (or monthly repayment costs if they restrict their loan terms) and therefore restricting the numbers they can buy.

Some scenario testing which MAS probably did.

Age: 45 year old (20 years to retirement).
First property: Paid-up
2nd property: $1.5 mil condo
3rd property: $800k condo
Average interest : 1.5% p.a.

Under current rules (before this tightening), uncle will be subject to downpayments of 20% for 2nd house and 40% for 3rd house. He can take unlimited period mortgage (say 35 years) from any bank willing to lend him the money. So his upfront cost would be $640k for the downpayments, and ~$5k in overall montly repayments. Considering gross rental yields of 3% p.a. would mean that he still has a breakeven carry after you net off some costs. If he is still working, its like having someone paying for your house while you accumulate more capital to reduce the mortgage towards your retirement age, plus wait for capital appreciation. A sound strategy provided that things go well - quite a few uncles where I work has this gig going on I think.

Under the new rules, someone new looking to get into the game would be looking at much higher upfront costs or monthly repayments.

Scenario 1: Max tenure (35 years) but limited to 40% LTV
Downpayments - $1.32 mil
Monthly repayments : $2.8k

Scenario 2: Limited tenure (20 years) but follow the original LTV
Downpayments - $620k
Monthly repayments : $8.2k

For existing players they are pretty much unaffected. Only those thinking of adding to their properties would have to reconsider. On balance I think the measures are pretty calibrated against a segment of buyers - consistent with how they have done their measures in the past.
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#10
If bank interests rates goes up, will the property value drop or rise? :O
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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