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Get Smart on Property Financing

Written by Dennis Ng on .

Business Times Property Supplement Year 2012
Published February 23, 2012


JUST mention 'property financing' and some people start to get a headache, especially those who do not like to look at or crunch numbers. Fret not, we share with you some tips in this article that will help you get savvy on property financing, including the latest rules and finer details.

Property cooling measures - how do they affect your housing loan?

If you have an existing housing loan, for the next property you purchase, you can get a maximum of only 60 per cent financing, which means you will need to come up with at least 40 per cent of the purchase price yourself including at least 10 per cent cash.

If you have an existing property which uses Central Provident Fund (CPF) savings, when you purchase a second property and wish to use your CPF, you need to set aside the CPF Minimum Sum Cash Component, which currently stands at $65,500. This CPF Minimum Sum Cash Component is made up of balances in your CPF Ordinary Account and CPF Special Account.

Here's an example.
If you have $50,000 in your CPF Ordinary Account and $30,000 in your CPF Special Account totalling $80,000, how much CPF savings can you use to purchase your second property? You need to deduct the CPF Minimum Sum Cash Component (currently at $65,500 and revised upwards annually on July 1 of each year). In this example, the maximum CPF savings you can use for the purchase of your second property is $14,500, not the full $50,000 balance in your CPF Ordinary Account.

However, if you have an existing property which is fully paid up, you can still get the maximum 80 per cent financing on your next property purchase. This is regardless of how many properties you currently own, as the maximum 60 per cent financing applies only to people with at least one existing property loan. Thus, some clients with a very low housing loan outstanding on their existing home will choose to pay off the existing loan in order to qualify for the 80 per cent financing for their next property purchase.

If you are looking at property as an investment and are in no hurry to invest, do not rush to pay off your existing property loan because there is a possibility that this maximum 60 per cent financing rule might be abolished when the property market turns sluggish. If history serves as any guide, in May 1996, a slew of property cooling measures were announced, but these were removed when the property market corrected significantly a few years later.

Taking housing loans on home purchase vs property investment: Any difference?

If you ask most people, they will probably tell you that they want to borrow as little money as possible for property purchase, and if they can afford it, they will pay off their housing loan as soon as possible. Is there a difference in taking housing loan on home purchase vs property investment?

For a home purchase, I would suggest taking the maximum financing approved by the bank, which is currently 80 per cent for the first property purchase, even if you can afford to borrow less. Why? Because to me, I see a housing loan instalment as a form of 'rental replacement', because if you decide not to buy a property for own use, you would have to pay rent. So taking a lower loan, in a way, is similar to paying rent in advance, which does not make sense.

Furthermore, a housing loan is the cheapest loan you can ever get; currently the interest rates are about 1.2 per cent - less than half of the 2.5 per cent that CPF pays you.

So for a home purchase, it is okay to take the maximum 80 per cent financing and as for the loan period, this should tie in with your intended retirement age. If you intend to retire at age 60, then the loan should be fully paid off by age 60 and not 70, for example.

You should also only buy a home that you can comfortably afford by making sure that your housing loan instalment does not exceed 35 per cent of your gross income. For a home purchase, you can consider using two thirds of your CPF Ordinary Account contribution and top up in cash payment any excess amount. Why not use up all of your CPF Ordinary Account contribution? The reason is we must remember that the primary objective of our CPF is to build a retirement nest egg and thus, we should try not to use up all of our CPF Ordinary Account savings for property financing.

For property investment, even prior to the current loan-to-value limits taking effect and when you could take 80 per cent financing, for prudence's sake, you might want to limit maximum financing to 70 per cent of the property price.

By doing so, even if property prices fall, you minimise the risk that the bank would ask you to top up money. For instance, if you take 80 per cent financing and if property prices fall by 30 per cent, the bank might ask you to top up 10 per cent. However, if you take 70 per cent loan, this is unlikely to happen.
Should you apply for a loan for a property that will receive Temporary Occupation Permit (TOP) three years from now?

If you buy a property under construction, you can choose to apply for a housing loan later rather than at the point of purchase. However, you should consider applying for a loan now because firstly, property prices can move up or down and banks would only grant financing based on latest valuation figures. In the event that property prices fall when the property is completed and the valuation falls, you might fail to get the quantum of financing you need. Furthermore, there might also be changes to your income and financial situation, which might affect loan approval. Thus, it is advisable for you to apply for a housing loan at the point of property purchase rather than to wait.

Would interest rates remain low for housing loans?

Singapore Interbank Offered Rate (Sibor) is the average market interest rate banks pay when they borrow from or lend to one another in the interbank market. The three-month Sibor is used by banks as a gauge of interest rate trends. Thus, If you want to know the trend of interest rates on housing loans, you should keep a close watch on the movement of the three-month Sibor.

Currently, the three-month Sibor is at about 0.39 per cent and may remain low for the next six to 12 months if US interest rates stay low. However, interest rates do not stay at low levels forever. Thus, if you are worried about the possibility of interest rates moving up in 2013 and beyond, you might want to choose a housing loan package with fixed interest rates for the next three years, or a Sibor-pegged package that has a 'cap' on interest rates for the next few years.

If you plan to sell your property within the next two to three years, then you might want to consider home loan packages with a shorter penalty period or with zero penalty period instead. There are frequent changes to packages offered by banks and at any one time, there might be over 113 different packages offered by 16 major financial institutions in Singapore. Thus, you may wish to consider engaging the services of an independent mortgage broker who can provide you with unbiased analysis and comparison of all home loan packages from all banks. Typically, the service is provided to you free as banks would pay them a fee separately.

The writer is an accountant by training and has 19 years of bank lending experience.
He founded, a mortgage consultancy in Singapore, in 2003 and also set up, a financial education portal, in 2009.