Tuesday 7 August 2012

50-year home loan a 'gimmick', says Khaw

He urges Singaporeans to remain prudent, says such loans are unwise
By Chia Yan Min, The Straits Times, 6 Aug 2012

IN THE midst of global economic uncertainties, Singaporeans should stay focused, be prudent and spend within their means, said Minister for National Development Khaw Boon Wan yesterday.

He also advised Singaporeans against taking up 50-year housing loans, which at least one bank here has recently started offering.

Calling it a "gimmick", Mr Khaw said: "Please don't fall for that, it doesn't make sense."



Last month, The Straits Times reported that United Overseas Bank (UOB) had started offering home loans spanning 50 years, likely the longest-term loan available here. Among other banks, loans range from an average of 20 to 40 years.

Said Mr Khaw: "If you immediately come out from school and want to get a five-room flat, and you think a 50-year loan will help you achieve that, I don't think that is very wise."

He was speaking on the sidelines of a National Day observance ceremony in Woodlands.

Instead, buy a three-room flat if that is what you can afford, he said. And upgrade to a bigger flat when your salary or the value of your flat grows.

Mr Khaw said he checked on the take-up rate of this new 50-year loan and "so far, the number is very few, which I think is a good sign, that Singaporeans know we should always be prudent".

When asked, UOB's head of secured loans, Ms Chia Siew Cheng, said the majority of those who take up a home loan with the bank still tend to apply for loans with a tenor ranging from 25 to 30 years.

The bank also carefully assesses each application for all types of home loans, and applicants cannot be above the age of 80 at the end of the loan period, she said.

"We are very clear with applicants that the longer repayment period and loan tenor also mean that more interest will be payable over the period of the loan," she said.

Mr Nicholas Mak, head of research and consultancy at SLP International Property Consultancy said that while a 50-year loan would allow people to take a bigger loan and buy a more expensive property, "there would not be much room to manoeuvre if the interest rate were to go up, or if the person were to lose his source of income, and the borrower might be caught in a financial vice".

Yesterday, Mr Khaw also defended again the National Parks Board's (NParks) decision to buy 26 Brompton foldable bikes recently.

Mr Khaw had said that he and his ministry decided to refer the case to the Corrupt Practices Investigation Bureau after an internal audit he ordered uncovered discrepancies which suggested the possibility of bias in the tender process of the bikes. While he had publicly defended the decision to buy the bikes, he was not happy with the procurement outcome.

He added yesterday that he had recently spent time with NParks officers on their daily tree inspection, which was unlike city patrols on flat surfaces.

"I am convinced that in the case of NParks, the type of work that they do or at least for some of the staff, foldable bikes are a good decision and the right judgment."


50-year home loan not advisable: Experts
Reasons include substantial total interest paid, danger of overspending
By Daryl Chin, The Straits Times, 7 Aug 2012

WHILE a 50-year home loan helps ease the cash flow for young couples, the interest paid on it will eventually reduce the potential profit that can be made on a property, said most financial advisers yesterday.

Such long-term loans, with their lower monthly payments, may also lure couples to spend beyond their means in the meantime, they added.

What they should do when starting out is to buy a smaller flat within their means and upgrade later when they can afford it, said chief executive M. Salim of First Principal Financial, which advises on home loans and investments.

He was among 10 financial planning experts interviewed yesterday who unanimously advised against taking a 50-year home loan.

United Overseas Bank (UOB) introduced such a mortgage recently and on Sunday, National Development Minister Khaw Boon Wan cautioned would-be home buyers against it.

Calling such loans gimmicks, he urged especially fresh school- leavers eyeing a five-room flat not to fall for them. "It doesn't make sense," he said.

Financial adviser Damian Pang, however, argues that for people buying a property for investment rather than to reside in, a 50-year loan could be a boon.

The reason? "The cash burden is less heavy and should interest rates rise, the monthly payments would still be manageable," he said.

Home loans typically range between 20 and 40 years.

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

"This will eat into your capital gains when you sell your property, and you would not have made as much profit," he added.

Say, at the current 2 per cent interest rate, the monthly payment for an $800,000 loan is about $2,100 for a 50-year loan, and about $3,000 for a 30-year loan.

At the end of the loan period, the interest paid will be about $466,000 and $264,000, respectively.

Mr Kua said that about 90 per cent of his company's 50,000 customers opt for loans of 30 to 35 years.

Mr Salim noted that part of the bait in coaxing people to buy pricier homes is the success stories in recent years of home owners making huge profits from buying and selling residential property.

"With this mindset, many young people look at resale value rather than their financial capability. They over-commit, thinking the market will always stay buoyant and never crash," he said.

UOB's head of secured loans, Ms Chia Siew Cheng, reiterated yesterday that its offer is aimed at young executives who are "serious about buying a home".

"As their careers progress, they have the flexibility to shorten the loan tenor and make partial capital repayments," she said, adding that UOB encourages its customers to assess their personal circumstances carefully before committing to a long-term loan.

Last month, the Monetary Authority of Singapore said it was monitoring the mortgage product.

Several young people interviewed share the view of civil servant Marco Low, who put his name down recently for a new four-room flat in Queenstown.

Said the 25-year-old who plans to marry next year: "It's a matter of preference. Some don't mind paying a loan till they are past 70 years old.

"I'd rather be debt-free by the time I retire."

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