The current low interest rate environment has led to a trend of home buyers refinancing their loans to take advantage of promotional rates. Most analysts agree that it may no longer be attractive for investors with longer loan terms to do so, given the 35-year cap on new home loans.
Most home buyers refinance their mortgages in the third or fourth year of their loan repayment period. This as interest rates step up gradually over time, and as the usual ‘lock-in period’ for a loan package expires.
Usually lasting two to three years, the lock-in period refers to a period during which the borrower has to pay a penalty if he changes the terms of the contract, either by cancellation, prepayment or conversion.
But now that tenures for new loans are capped at 35 years, mortgage advisors said some home buyers looking at refinancing may be caught in a snag.
Under the new rules, those who want to refinance existing home loans will have to make sure that the tenure of the refinancing facility and the number of years that have elapsed since the first loan was disbursed, cannot add up to more than 35 years.
Timothy Kua, director of SmartLoans.sg, said: “If you bought a property say, three years ago, on a 35 or even 40-year loan tenure, and should you now decide to refinance to a different bank to enjoy better interest rates; in order not to violate any of the new rulings, you will have to shorten your loan tenure with the new bank to 30 years and this will result in a significant increase in your monthly payments, which you may not be able to afford.”
When the loan tenure is reduced from 35 years to 30 years, monthly payment could increase by 13 per cent, according to research by Maybank Kim Eng. This is for a S$1 million loan, with interest rate at 1.5 per cent per annum.
The restrictions come at a time when more than 45 per cent of new housing loans granted have tenures exceeding 30 years.
With net interest margins under pressure due to globally low interest rates, banks have promoted loans with longer tenures to boost loan growth. But stretching out loan tenures could give consumers a false impression of affordability.
Jonathan Koh, associate director at UOB Kay Hian Research, said: “These rules do prevent home buyers from over-extending themselves, buying homes that they cannot afford, and secondly, it does preserve the stability of the financial system within Singapore.”
When asked about the proportion of such long tenure loans that will be eligible for refinancing, the three local banks and most foreign banks here declined to comment.
In an emailed comment, HSBC Singapore said most of its customers who refinance their loans prefer loan tenures under 30 years.
Loan growth is expected to slow to 10 per cent this year, down from 28 per cent in 2011.
Shares of Singapore banks have fallen by as much as three per cent since the new rules were announced.
Source : Channel NewsAsia – 10 Oct 2012
Property demand to cool but prices may show resilience, CapitaLand top pick: CS
The government's latest property cooling measure unveiled on Oct 5, where the loan tenure is capped at 35 years, will change the attractiveness of property as an investment, Credit Suisse said.
The measure, seen as the 7th round, comes slightly over a month after the government tightened on "shoebox" units (see chart below).
It affects all new residential property loans. In addition, for loans exceeding 30 years tenure or if the loan period extends beyond the retirement age of 65 years, these borrowers will face significantly tighter loan-to-value (LTV) limits.
In its report on Singapore's property sector, Creidt Suisse believes volumes will be hit in the near term.
"Driven by constraints on upfront payment (liquid assets at hand), people / couples over 35 are likely to opt for shorter tenure loans (to preserve the 80% LTV). This could deter some demand, with monthly mortgage payments likely to increase 13-21% (depending on tenure),'' Credit Suisse said.
However, most buyers should be able to absorb the increase given the household balance sheet strength.
Th research house also believes that the new measures could also deter some investment appetite.
Buyers could be put off by the negative carry, as a shorter loan tenure means higher monthly instalments, which may be unattractive to some investors if the rental income received is insufficient to cover the monthly instalment.
Older investors could opt for longer tenure loans, but buy properties close to half the ticket size of what they could earlier.
"Either way, we believe 'investment' demand for larger ticket properties will likely soften in the near term, as a result of the recent measures,'' Credit Suisse said.
It estimated that some 31 per cent of buyers who previously indicated their intention of buying property for investments could be affected by the latest round of measures.
Headline prices may surprise the market by being resilient. This is because vacancy rates are well below long-term averages, particularly in the mass market.
" Given the weaker demand outlook, developers may also choose to delay property completion - supporting shorter term prices,'' Credit Suisse said.
CapitaLand is the research house's "top pick" among the property counters.
"We believe some of the overhang has been priced in,'' it said.
At 0.9 times price to book, CapitaLand is preferred for the likely improvement in earnings momentum in 2013, driven mainly by CapitaMalls Asia (CMA) and its more diversified income base. Singapore residential accounts for less than 10 per cent of the property group's portfolio.
Credit Suisse said the downside risk to the stock price is supported by share buybacks.
City Developments Limimted, however, may see some pressure if volumes fall in the near term but any pullbacks present an entry opportunity, Credit Suisse said.
