For the last 1 week, banks are withdrawing freebies/benefits which normally come with a housing loan package. A move prompted by MAS which is suspected to be control measures to tighten up the property market a little but which has been implemented in a subtle manner through the banks, without much publicity.
On 5 Oct 2012 Friday late evening, MAS announced yet another tightening measures on the property market. This time is on the loan tenor limit.
For new purchase of residential properties (HDB and private), if the loan tenor is over 30 years, the loan quantum will be reduced:-
- from the current 80% to 60% (for those with no existing property loan); and
- from the current 60% to 40% (for those with at least 1 outstanding property loan).
The overall loan tenor is capped at 35 years and not exceeding age 65. This applies to refinancing of properties where the loan tenor of the refinanced loan will have to be added to the loan tenor of the very first loan taken to finance the purchase of the said property, and the total loan tenor shall not exceed 35 years.
How will this impact the home buyers?
Before this new rule on loan tenor, most borrowers are prepared to take on a longer loan tenor if banks are willing to grant them as this would allow them to make smaller payment every month. They would have more control and flexibilities to manage their funds while having the option to make lump sum partial repayment with any excess funds.
But now with the new ruling, at 80% loan, home buyers are allowed to borrow up to 30 years. For a longer loan tenor of 35 years (max), the home buyers can only borrow 60% loan. This applies to those with this loan as the only loan they have. Correspondingly, for those with over 1 outstanding property loan, for a longer loan tenor of 35 years, the loan quantum will be reduced to 40%.
Let's take a look at the difference in instalments for a 30-year and 35-year loan tenor:
For a 30-year loan, based on $500K loan, the instalment is $1631 at 1.1% interest rate.
For a similar loan with 35 years loan tenor , the instalment will be lower at $1435 by $196 (about $200).
For a $1M loan, the difference in instalment will be doubled to about $400 per month.
How about the loan quantum when reduce from 80% to 60?
For a $500K property, at 80% loan, the downpayment works out to be $100K.
At 60% loan, the downpayment will be higher at $200K by $100K.
For a $1M property, the difference in downpayment will be doubled to $200K.
Going forward, it is no longer worthwhile to go for a longer loan tenor of 35 years. This is because the lower monthly payment cannot make up for the additional lumpsum downpayment that has to be forked out.
How will this impact existing home owners going for refinancing?
For home owners enjoying loan tenor of over 35 years currently, they may have second thoughts on refinancing their loan. Under the new ruling, the loan tenor for the newly refinanced loan will have to be revised to 35 years. This will mean higher payment every month to them. They would have to work out their sums before refinancing.
For investors with more than 1 property loan, they will need to have even deeper pockets to pay for the downpayment as well as to sustain the monthly payments. This is given that they can only qualify for 60% loan if loan tenor is at 30 years and now 40% loan for loan tenor of 35 years. Hopefully the rental income would be sufficient to cover the instalment.
As bank housing loan packages no longer come with freebies, HDB upgraders and private property buyers have to pay for their own expenses, like legal fee and valuation fee. They are now on par with HDB buyers getting loan direct from HDB Board where they have been paying own legal fee and valuation fee all these while.
After the few rounds of property curbs by MAS resulting in drop in loan volume, banks have been trying to compete for loans not only in interest rates but also in granting longer loan tenor making the loan seems more affordable. The latest move by MAS serves not only as reminders to home owners to be prudent when committing to buying a property but also a warning to banks to be prudent in granting loans.
Buying a property is a long term commitment. For a 30-year old, a 35-year loan will be fully paid by age 65 but for a 50-year loan, it will only be repaid by age 80. Would you want to worry about your house way after your retirement?