With interest rates staying at all-time lows, mortgage loans have been so affordable that the government has almost been forced to throw measure after measure at the property market to cool demand. However, conventional wisdom tells us that this abnormally protracted period of low interest rates cannot last, and that interest rates should revert to its long-term mean of about 2 – 2.5% pa, or implied mortgage rates of around 3.5% pa vs current mortgage rates of around 1.1% pa. It doesn’t really sound like much until you actually calculate your monthly payments in dollar terms. For every $1 million of loan of 30-year tenure, the monthly payment is going to increase from $3,263 to $4,490, a whopping 38% increase!
Here’s a flow chart to (hopefully) make things clearer for those still confused by the new ruling:
About 2 weeks ago, UOB announced that they were able to give loans of up to 50 year tenures. Since then, Minister Khaw Boon Wan has come out to criticise it as a gimmick and urged home buyers and owners not to fall for it. So, is it a gimmick as Minister Khaw says, or is there a case for it?
Before we go there, let’s take a look at the conditions for the loan. Besides the usual income/net worth requirements, borrowers have to be below 80 years old at the end of the loan tenure. If the property is leasehold, it must have at least 35 years left on the lease at the end of the loan tenure.
Since my post touching on freehold versus leasehold, I’ve had a couple of enquiries on investing in certain leasehold developments with what I’d term “enbloc aspirations”. I’m not going to go into a full-blown post on enbloc today, let’s just say that developers’ primary duty is to make profits for their shareholders. They will only pay to enbloc owners a price that makes economic sense to them, so make sure your buy-in price is a good margin below that, else it’s not worth the effort and uncertainty of waiting out for an enbloc.
Moving on, I’d like to do a little post on planning your exit strategy instead. As any seasoned entrepreneur will tell you, you must have an exit strategy if you intend to make any serious money. The other thing to bear in mind? Always, always have a Plan B for when things don’t immediately run in your favour.