Likely pitfalls in getting a housing loan

Source : Business Times - 26 Mar 2009

Problems can arise from changes in valuations, deferred payments and loan-approval criteria, warns DENNIS NG

IF YOU are looking to buy a property, beware of potential pitfalls, including those related to getting a housing loan.

In the past, most home buyers would pay the one per cent option to secure the property before looking for a housing loan. If you do this now, you might regret it and here’s why.

It has been clear over the past few months that property prices in Singapore have turned down. And with global economies expected to weaken further, the trend for property prices is more likely to be down than up in the months ahead.

So, even before you put money down on your option, check the market valuation of the property. There have been instances where buyers checked the market valuation of a property with the bank only to get a nasty surprise some weeks later when they finally write out a cheque for the option. That’s when they find out that the bank’s valuation of their property has gone down.

Latest valuation

We know an instance where someone purchased a property for $2 million and then found out some months later that the valuation had fallen by about 10 per cent to $1.8 million. In other words, he ended up having to fork out an additional $160,000 in cash as the bank was only willing to grant a loan of $1.44 million, or 80 per cent of the revised valuation of $1.8 million, rather than the original loan of $1.6 million.

The buyer could have avoided this pitfall if he had gotten a mortgage broker to check the latest indicative valuation within a few days of buying the property.

Another problem can arise with deferred payments. In 2007, properties were selling like hot cakes and many people had bought them from developers under the deferred payment scheme. That’s where buyers were only required to come up with 10-20 per cent of the purchase price and pay nothing more until the property obtains its temporary occupation permit (TOP) about three years later.

According to estimates, more than half the buyers who bought property under the deferred payment scheme have yet to apply for a housing loan. In the past year or so, many properties have seen their values fall by 10 per cent to 30 per cent, so when these buyers finally apply for a home loan, they are likely to have to cough up an additional 10-25 per cent of the purchase price.

For example, someone who bought a property for $1 million in 2007 would see the current valuation of the property drop to about $800,000. In other words, he would probably be able to get a maximum loan of 80 per cent of $800,000 - or $640,000. That’s $160,000 extra that he would have to foot in cash or CPF savings. In effect, he is putting up 36 per cent of his purchase price upfront.

With global stock markets falling further in recent weeks as economic conditions deteriorate, property valuations might drop further. Thus, if you have bought a property under a deferred payment scheme but have yet to apply for financing, I strongly advise you to get financing as soon as possible.

There are housing loan packages out there which offer free loan conversions. If you apply for a housing loan now and a better loan package comes along when the property reaches TOP, you can always convert to a more attractive package without penalty.

Getting financing earlier is safer too, should there be any adverse change in a home buyer’s financial position, such as a pay cut, or deteriorating credit standing due to delays in paying existing loans. Then, the home buyer might not be able to obtain any financing for his property at all!

To mitigate the risks of falling collateral value, banks have become more cautious in granting financing for properties. Very few banks are willing to offer 90 per cent financing, and if they do it would primarily be for first-time home buyers.

Banks are also more stringent in assessing the borrower’s ability to service and repay debt. There are instances where property speculators might only obtain financing of 70 per cent for properties bought for investment purposes. For borrowers who have a slightly weaker credit profile, financing might even be capped at 60 per cent of the purchase price or valuation, whichever is lower.

Prudent step

To be prudent, property buyers should approach a mortgage broker to help secure a prior bank loan approval before committing to a property. By doing so, you would avoid the danger of being unable to obtain sufficient bank financing for your property.

The silver lining in all this is that interest rates are also dropping. Over the past year, the Singapore inter-bank offered rate (Sibor) - the interest rate at which banks borrow from one another - has fallen from over 2 per cent to about 0.7 per cent currently.

If you had taken a home loan one to two years ago, chances are you might be paying an interest rate of 3-4 per cent. It is possible for you to refinance your loan today and end up paying as low as 1.65 per cent, from say, 3.5 per cent. Assuming an outstanding loan of $300,000 and a remaining loan period of 20 years, by refinancing, you might save as much as $5,500 in the first year alone! Even after deducting the cost of refinancing of about $1,000, you are still $4,500 better off.

Thus, refinancing your existing housing loan now might be one of the best ways to ‘create money’ for yourself by cutting down on your interest expenses.

You can also take advantage of cheaper mortgage rates by borrowing more if your property has appreciated from its original price. If you had bought your property a few years ago, chances are its current valuation is still much higher than your purchase price.

Say, you had bought a property costing $1 million five years ago and have an outstanding loan of $500,000 on it. The current valuation might be $1.5 million. Thus, even if you take out an additional loan of $500,000, bringing the total loan amount to about $1 million, it works out to just 67 per cent of the property valuation and well within the 80 per cent financing limit for a property.

The good news is that the additional loan of $500,000 comes at a low interest rate of about 2 per cent, which is possibly the cheapest loan a typical consumer can obtain.

Securing a housing loan has become more tricky with fast-changing circumstances in terms of property valuation and loan-approval criteria. One’s financial situation might also change due to pay cuts and threat of retrenchments. So to be safe, get your home loan approved before you commit to buying your property.

The writer is a Certified Financial Planner with 15 years of experience in bank lending. He co-founded an independent mortgage consultancy portal www.HousingLoanSG.com in 2003