Wednesday, July 25, 2012

50 years home loan in Singapore

One more sign of housing bubble in Singapore has came last week, United Overseas Bank (UOB) has introduced a 50 year home loan in Singapore (half a century!) which allows the home owner to stretch his home mortgage to 50 years!

UOB introduced this longer loan duration as more customers have been requesting for such loans. 
However, these loans come with conditions. 'This type of loan is applicable to private residential and HDB loans only,' said Ms Chia Siew Cheng, UOB's head of secured loans and personal financial services. As well, borrowers above a certain age are not eligible, but UOB declined to say what the cut-off age is. 
And if the property is leasehold, it needs to have at least 35 years left on the lease at the end of the 50-year loan. 
Ms Chia noted that the loan has its pros and cons. Having a longer term 'will result in a smaller monthly loan instalment and will be easier on monthly cashflows. However a longer repayment period also means that more interest will be payable'. 
Financial adviser Damian Pang warned that by taking on such a long-term loan, the homeowner will be servicing the loan long into his retirement years.
Source :  Home loan repayment can now stretch to 50 years

Although 50 years home loans may help to feel many that they can afford to buy a 1 million SGD+ (mass market!) condominium unit, as they will be able to pay the installments now, it means the borrower will pay the loan well into his retirement (and probably his kids will continue to pay after he dies) and at the end he pays a huge amount of what should be his retirement saving as interest to the bank.

National Development Minister Khaw Boon Wan criticized the 50-year housing loan as a “gimmick”, and urged prospective home buyers not to fall for it:

"Speaking to reporters on the sidelines of a community event, Mr Khaw called on home hunters to spend
within their means. “My message has always been prudence ... There is now some gimmick, a bank offering 50-year loans. Please don’t fall for that, it doesn’t make sense,” he said."
Source : 50-year loan a gimmick: Khaw

Currently, a 50 year mortgage with 1.7 percent interest rate on 1 million SGD property translates into $2,475 per month mortgage payment, which can easily be covered by the rent of that unit. Same loan would translate into $3,578 per month for a more common 30 years home loan. But when the interest rates goes up to just 3 per cent, less than historical average, monthly payments goes up to 3.220 SGD per month.

The plain truth is this: If you cannot afford a house with 30 years of loan, you cannot afford it. Even if you can afford a house with 30 year loan with current interest rate but you cannot do this with historic interest rate average + 2-3 points, you can also not afford that house.

Remember, 50 Year Mortgage were introduced in California in 2006, just before the great housing bubble in USA were about to explode:
"In the United States, 40-year mortgages were offered during the housing bubble of the early 2000s, as house prices climbed dramatically. There has been talk of creating 50- and 100-year mortgages in the future, and these options are occasionally available today in the form of seller-financed loans." 
Source : What Is the Longest Mortgage?
These loans just signal that people are demanding to buy properties which are extremely unaffordable for them. Some would remember the 100 years home loans introduced in Japan before great Japanese property bubble has exploded taking all the national economy down with it. Below article is from 1990s, from heights of Japanese housing bubble which was about to burst:
"The Japanese, famous for saving, are now loading their future generations with debt. Nippon Mortgage and Japan Housing Loan, two big home lenders, are offering 99- and 100-year multigeneration loans with interest rates from 8.9% to 9.9%. Borrowers put up their homes as collateral. Such deals represent sound fiscal planning for some families, especially the very wealthy living in Tokyo who, perversely, can almost not afford to inherit a house: Japan's graduated inheritance tax can take up to 70% of a family's assets, including its home. Under the 100-year loan plan, a second generation can move into a deceased parent's home and pay inheritance taxes on only a fraction of the house's value. Most Japanese, of course, don't have such problems. Their challenge is to find a house they can afford, especially if they want to live in Tokyo. The housing crunch there inspired Robinsons on the Sand, a 1989 hit movie that's now No. 8 on Japan's VCR rental list. It tells the story of a salaryman and his family, who are willing to do anything to escape the misery of their tiny rented apartment. The ''anything'' turns out to be living on constant display as a ''model family'' in a spacious model home while potential buyers tramp through. Jealous neighbors bully the children and make obscene phone calls. Before long, one of the two sons turns delinquent, the daughter is killing kittens, and the father ends up homeless in the street. Mom and the kids finally return to their old apartment, where they watch TV in the closet in blessed privacy. So much for that particular family's Japanese dream."

As you can remember from the ridiculous Bloomberg article Singapore Homes Most Affordable As Rents Climb by Pooja Thakur and Sanat Vallikappen, many think a property is affordable if you can cover its monthly payments now, in the age of artificially low interest rates. We have repeatedly seen what happens to that so-called affordability once the interest rates go up. As a commentator wrote:
"There is no mention of the huge risk leveraged buyers face when interest rates eventually normalize. As well, there is no mention of any down payment required in order to achieve the monthly mortgage payment that apparently beats the rental payment. 
Be that as it may, the best days of Singapore property are in the past, as Singapore property is already in late stages of a bubble. Sadly, many inexperienced local "investors" will lose their life savings once the bubble bursts. Articles like this only help to drive fools into the abyss."
Source : Singapore Homes Most Affordable As Rents Climb
How will Singapore home buyers react to these new loans? Although UOB  says more customers have been requesting for 50 years loan, average loan period for Singapore is around 30 years:
At mortgage consulting firm, about 70 per cent of its clients opt for 25- to 30-year loans, with 15 per cent going for 30 to 35 years, and the rest choosing less than 25 years. Longer tenor loans are more suitable for investors as “the less capital they put into the property, the higher their return”, said the site’s founder Dennis Ng.Source : Home buyers ‘still prefer shorter-term loans’

1 comment:

  1. 50-year home loan? That's insane! I can only imagine the total interest paid on this one.

    Chris from