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Impact Of New Mortgage Loan Restrictions

>> Saturday, October 6, 2012

In a MAS release that will take immediate effect, the government will intervene on mortgages for HDB flats and private properties. These home loans can only span 35 years and those wanting loans longer than 30 years or tenures exceeding the borrowers' age of 65 can only borrow up to 60 per cent of the property price.

My humble opinion on the impact.

Firstly, it will affect those who wish to take loan tenures that stretch longer than age 65. This group of people is already over stretching in the first place. It is only logical and prudent to limit the age to the retirement age of 65. Of course, there will be those who invest in property and the recurring rental income is assumed to supplement the mortgage installments well pass the owners’ age of 65. Therefore, this group will be affected to exercise more caution on their assumption of continuous rental income.

Secondly, 30 year tenures. A quick calculation is 65 minus 30 to arrive at the age to take the longer loan tenure are 35 years old. Anyone above that age, who is taking a loan, will need to take a correspondingly shorter tenure. Considering most property investors average age is about 40 to 45, because by now they will have paid off majority/all of their existing property mortgage (note: property prices were much cheaper when they started their loans 15 years ago), they will possess the savings and income to invest in a second property. They will now be restricted to a 15 to 20 year mortgage; else they will have to fork out a hefty down payment. This would mean monthly installments that rental cannot cover. However, if they possess a high income that can cover the difference, they can still invest, albeit more prudently as they will need to consider contributing to the difference monthly.

Thirdly, 40%/60% down payments when all criteria fail. In my opinion, those who fail to meet new mortgage criteria, in general do not even bother with mortgage. They will be the ultra rich (including foreigners from places like Malaysia, Indonesia, China) who purchase properties without even taking on mortgages. Hence, the down payment or loans are irrelevant to them.

In conclusion, the new measures are reasonable and impact is meant to have people make more prudent decisions. Those not following these guidelines in the first place are already making speculative decisions and should only be the minority.

However, my concern are:
-         How long will these measures be in place
-         This is quite a dampener for less wealthy individuals who wish to use property as a leveraged asset class to invest and squeeze themselves just to meet the criteria at the borderline now. In future when markets (property prices and rental rates) come down, interest rates go up, they will be caught in a tight situation
-         Banks and developers will still get creative to circumvent the measures and introduce workarounds that have hidden consequences while at the same time taking advantage to position it as a unique selling point


Wealth management consultation October 6, 2012 at 1:29 PM  

No doubt these restrictions will affect pockets of less wealthier people but these restrictions will avoid price bubble & bring log term stability in property market.

Lau October 6, 2012 at 10:00 PM  

Hi WMC. I believe it will do little to impact prices. It is meant more to sieve out people who over leverage this asset investment. As for long term stability, brings me to the concern of how long will this restriction be in effect. Will it be removed when prices come down?

financialray October 8, 2012 at 7:09 PM  

Hi Lau,
Sure restrictions will be removed when prices start to go down. But you will be more worried about the reasons why prices are going down by then.
In my humble opinion, there are "enormous problems" 8 to 10 years down the road. The population department said we need to immigration or the economy will suffer in about 8 years. However, the measures for our total fertilty rate will not work because they are half hearted. The police force are now short and the NSF will be pushed to the frontline. These are vital institutions that will feel the impact because strictly no foreigners. What will happen when our local population shrinks significantly in 10-20 years? Can the CPF and the insurance companies like NTUC cope? Can the SAF and police force cope? Even if measures instituted now are correct, it will take 20-25years to change the tide. We are now beginning to experience the decline in population 25-30 years after the STOP-at-2 policy. The bad news is our current measures to boost the TFR are unlikely to work. If this property bubble continues till 2020, then more people will suffer. It is better to keep this bubble in check.

Lau October 8, 2012 at 9:17 PM  

Hi fr. I do not think that this will keep prices in check in the near term. It would rather cause people to make more prudent choices only. To protect those rash decisions from becoming a problem when the down cycle comes.

You are assuming really far for fertility and into 2020. Won't want to speculate to that territory just for a topic on mortgage restriction.

financialray October 9, 2012 at 9:12 AM  

Hi Lau,
When one chooses to invest in property, one has to be prepared for the long term of 5 to 10 years at least. Hence, one has to try to visualise how things may pan out in 2020. Of course, great visionaries like LKY will provide very useful opinions on and off.
Especially more so when many Singaporeans use their CPF for their properties.
One has to ask certain questions if certain scenarios pan out eg
what if minimum sum for CPF is raised even higher?
what if age for withdrawal of cash is raised even higher because life span is increasing and population is shrinking?
If ill prepared, property invstment can be a very dangerous leverage as it can cut both ways.

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