Do your homework before buying property

Mr Menon, who is with OCBC Bank, warns of the risk of higher interest rates this year and the uncertainty about jobs.
Mr Menon, who is with OCBC Bank, warns of the risk of higher interest rates this year and the uncertainty about jobs.
UOB's Ms Tan points out that banks can lend only 40 per cent of the property cost if one is above 65 years at the end of the loan tenure. Ms Phang of OCBC Bank notes that when there are joint borrowers, their average ages and incomes do influence the
Mr Menon, who is with OCBC Bank, warns of the risk of higher interest rates this year and the uncertainty about jobs.ST PHOTO: SEAH KWANG PENG
UOB's Ms Tan points out that banks can lend only 40 per cent of the property cost if one is above 65 years at the end of the loan tenure. Ms Phang of OCBC Bank notes that when there are joint borrowers, their average ages and incomes do influence the
UOB's Ms Tan points out that banks can lend only 40 per cent of the property cost if one is above 65 years at the end of the loan tenure.ST PHOTO: SEAH KWANG PENG
UOB's Ms Tan points out that banks can lend only 40 per cent of the property cost if one is above 65 years at the end of the loan tenure. Ms Phang of OCBC Bank notes that when there are joint borrowers, their average ages and incomes do influence the
Ms Phang of OCBC Bank notes that when there are joint borrowers, their average ages and incomes do influence the loan tenure.ST PHOTO: SEAH KWANG PENG
OCBC Investment Research analyst Eli Lee says local listed developer stocks have had a good start this year.
OCBC Investment Research analyst Eli Lee says local listed developer stocks have had a good start this year.ST PHOTO: SEAH KWANG PENG

Make sure you can afford to repay loan, even if circumstances, interest rates change

Buying property is a big financial and long-term commitment for most of us.

So, we should do our homework when it comes to financing.

Mr Vasu Menon, OCBC Bank's senior investment strategist, says buying a home is a very personal decision and that there is no uniform answer on whether you should purchase or upgrade now. Much depends on your circumstances and personal finances.

When deciding to buy a property, consider your ability to pay the mortgage when interest rates and your circumstances change.

It is prudent to ensure that you have sufficient funds set aside to cover your expenses, including home loan repayments, says Ms Jacquelyn Tan, head of personal financial services, Singapore, at United Overseas Bank (UOB).

Mr Menon warns of the risk of higher interest rates this year and also that jobs are not a sure thing, given the uncertain economic climate.

So, it is important to be brutally honest and not take on more debt than you can afford when buying a property or other big-ticket items.

You must also factor in the property cooling measures, which set a limit on the amounts you can borrow and the loan period. Most of these measures effectively let us borrow based on affordability, helping us to right-size our property purchase and home loan.

Ms Tok Geok Peng, executive director of secured lending at DBS Bank, says: "You could find that you have to make a bigger down payment with cash or your Central Provident Fund savings, or find that you cannot afford the unit you want and have to opt for another with a lower price."

  • Eye on property developer stocks

  • Buying an investment property is not the only way to make money in real estate; you can also buy shares in developers.

    Mr Eli Lee, investment analyst at OCBC Investment Research, notes that Singapore-listed developer stocks have had a good start this year, with the FTSE Straits Times Real Estate Holding and Development Index up 13 per cent, its best showing in over four years.

    He says the aggressive rally was kindled by long-depressed valuations across the sector and rising anticipation that cooling measures could be reversed over 2017 and 2018. Home prices are now down nearly 12 per cent from their 2013 peak.

    "With primary home sales rising 7 per cent to almost 8,000 units in 2016 over 2015, a soft-landing scenario for the domestic residential sector is appearing increasingly realistic," says Mr Lee.

    He adds that developers with significant majority shareholders trading below their net worth continue to appeal to investors chasing profits by buying into firms that may be bought out or delisted. OCBC Research's top picks are:

    •CapitaLand (target price at $3.68)

    •OUE ($2.17)

    •Wheelock Properties ($2.27)

    •Wing Tai ($2.37)

    Lorna Tan

ADDITIONAL BUYER'S STAMP DUTY (ABSD)

Introduced in December 2011, this levy is paid on top of the existing buyer's stamp duty. The rate depends on whether the buyer is a Singapore citizen, a permanent resident, a foreigner or an entity like a trustee. The number of residential properties the buyer owns is also factored in.

The ABSD imposes a 7 to 10 per cent tax on Singaporeans buying their second and subsequent properties, and a 15 per cent tax on foreigners.

TOTAL DEBT SERVICING RATIO (TDSR)

The TDSR, which was introduced in 2013, measures all your monthly debt repayments against your monthly income. The higher your existing debts, the less you can borrow, says Ms Tok.

To qualify for a home loan, your TDSR cannot exceed 60 per cent. That is, your total loan obligations cannot exceed 60 per cent of your monthly gross income.

MORTGAGE SERVICING RATIO (MSR)

This is an additional requirement if you are looking to buy an executive condominium or an HDB flat. It measures the total amount of your monthly mortgage repayment against your income, says Ms Tok.

The MSR requirement limits your monthly mortgage repayment instalment to 30 per cent of your monthly gross income.

LOAN-TO-VALUE (LTV) The LTV

ratio at which banks may finance your property is capped at 80 per cent of the property price, and 90 per cent for an HDB loan.

Financial experts suggest that you check the maximum LTV that can be granted. Note that your LTV ratio decreases to 50 per cent from 80 per cent if you are buying a second property and have not paid down your existing mortgage.

LOAN TENURE

Ms Phang Lah Hwa, head of consumer secured lending at OCBC Bank, advises that for refinancing a home loan, the loan tenure is computed at 35 years less the number of years the loan was first disbursed when the property was purchased.

"Hence, documents need to be furnished to the bank to ascertain this. When there are joint borrowers, the loan tenure is also impacted by 'income-weighted average age'. This is calculated by taking the average age of the borrowers, weighted by their respective gross incomes."

Ms Tan notes that the retirement age of 65 has an important influence on applying for a mortgage.

"The maximum loan tenure is 35 years for a private property and 30 years for an HDB flat. If, at the end of the loan tenure you will be above 65 years old, the bank can lend you only 40 per cent of the cost of the home, as opposed to 80 per cent under normal circumstances," she says.

SEE INVEST

A version of this article appeared in the print edition of The Sunday Times on February 12, 2017, with the headline 'Do your homework before buying property'. Print Edition | Subscribe