The 50-year loan: Gimmick or Gimme?

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.

To be honest, I find it quite odd that MAS would allow this. By offering longer tenures, UOB is effectively reducing monthly mortgage payments, making property more affordable and thereby encouraging property investment. If the government had previously implemented cooling measures aimed at reducing speculation and investment in property, doesn’t allowing longer tenures go directly against that? This is especially so since the very first cooling measure in Sep 09 was the abolishment of interest-only loans.

The main beneficiaries, as mentioned above, would be property investors. With lower monthly payments, they are more likely to achieve positive cash flow. Lower mortgage payments will also give them better ability to hold through dips in the market.

As for home buyers, it may be tempting to go for a bigger property since the monthly payments seem more affordable. Also, UOB will be able to let you borrow more since the debt servicing ratio will be improved. While I think it’s still a good idea for buyers to take out a longer loan tenure, especially if it gets the monthly payments down to their monthly CPF OA contribution amount, buyers need to be very careful that they do not over-stretch their finances. One way to do this may be to determine the affordability of the property upon a 30- or 35-year mortgage instead. Doing this will put in a significant buffer for you in case of rising interest rates or if you need to reduce the tenure for whatever reason. Remember to put the monthly reductions in mortgage payments into investments that yield you more than the interest to make the best use of your money!

In conclusion, sorry Minister Khaw, but I disagree with your statement. I kinda like the 50-year loan. I think with the right approach, it can be a very useful tool for both the investor and the home buyer.

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