Friday, August 17, 2012

50 Year Home Loan: Should take or not?

There are two ways to gauge the affordability of a house: one is a deceiving one and another is a real one. The deceiving one is looking at the ratio of monthly payments of loan to your household income. Although this is used by many as the gauge, it is deceiving in a near-zero interest rate environment like the one we are having now since they make people to think that they can afford a house even they can afford it only under low interest rate environment. Combine this with a seemingly never ending increase in property prices you will have a fat, ugly property bubble waiting for the next interest rate increase to explode.

One phenomenon which seems to repeat itself towards the end of bubbles like this is the introduction of very long term mortgages. For example 50 Year Mortgage were introduced in California in 2006 just before the bubble was about to burst and 100 year multi-generation loans were introduced in Japan before their property bubble exploded painfully. So when a 50 year home loan package is by United Overseas Bank (UOB), a debate started: What does this mean for Singapore property market?

I personally believe that it is a sure way to financially suicide to take a very long loan at the peak of property price cycles. Although this peek may not trend downwards, it does not look to have a lot of support other than a hope(!) for a fresh round of money printing in USA, Europe and China.

The catch is simple: Monthly payment for a $800,000 loan is about $2,100 for a 50-year loan, and is about $3,000 for a 30 year loan. But the experts warn about the dangers:

"While longer-term loans are alluring for their lower monthly payments, the interest paid to the bank at the end of the loan period can be substantial, said director Timothy Kua of, which advises home buyers on the suitable mortgages available."

At the end of the loan period, interest paid will be about S$466,000 for 50 year home loan while it would be $264,000 for 30 year loan. Most of Mr. Kua's 50,000 customers go for 30 to 35 years loan.[1]

But everybody knows that whoever goes for 50 year loan does not plan to keep the home for that long. These people will assume eventually the property value will appreciate or they will earn more and refinance the property with a shorter term loan. Well, this assumption has its obvious dangers when European Debt Crisis is creeping through the financial system to become a full fledged economic depression.

After 50 year home loan news hit the media, 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.

Romesh Navaratnarajah says the prices are still too high even with 50 year home loan. He also writes that it is increasingly becoming impossible for fresh graduates to afford a home in Singapore.

[1] - 50-year home loan not advisable: Experts


  1. The post guides you whether you should take 50 years home loan or not. Good post

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  2. You need to make sure that you understand what materials will be used to construct your home. This means that if you are looking to have your kitchen counters built with marble instead of wood, you need to make sure that every little detail is listed and your preferences are taken into consideration while the building is going on. If the company you are using insists on providing their own materials for your home, you need to make sure you are aware of whether or not they will be charging an extra fee for the procurement of those materials in addition to the cost of supplies. Some companies add all of their hidden additional fees this way and others don't. If you pay attention to the fee schedule in your contract, you should be able to see any additional charges that you were originally planning for. The fee schedule should also list reasonable time frames for you to pay off certain percentages of your balance.

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