With all the new launch condos going on at the moment, it is not a surprise if you have bought one or seriously considering buying one whether it is your first property, second property or simply an upgrade. Well choosing and buying your under construction (BUC) condominium property is only the first part of the property transaction. The next part is in choosing your mortgage home loan.
Firstly, it is important to understand that investors view a completed resale property is of a lesser risk than one that is under construction. This view is also shared by the banks as you will often find that the best mortgage rates available are for completed properties. Lower risk means lower interest rates. So unless you have a very special relationship with a bank of financial institution, the best housing loans that you can get will most likely be the best loan package for under construction property, not the best deal in the market.
If you have already put down a deposit for your unit, the sales person or property agent must have also shared with you the payment schedule for your purchase. There is not standard payment schedule for the industry, how payments are staggered depends on the developers and how well they manage the scheduled milestones. It could look like this:
|1st – 5%||Obtain option to purchase (OTP)||–|
|2nd – 15%||Within 8 weeks of OTP||8 weeks|
|3rd – 10%||Completion of foundation work||12 months|
|4th – 10%||Completion of concrete framework||24 months|
|5th – 5%||Completion of brick walls||15 months|
|6th – 5%||Completion of ceiling||17 months|
|7th – 5%||Completion of doors, wiring, plumbing, etc||36 months|
|8th – 5%||Architect’s certificates of completion||38 months|
|9th – 25%||Temporary Occupation Permit (TOP)||42 months|
|10th – 15%||Certificate of Statutory Completion (CSC)||48 months|
It is theoretically possible to get a different loan from a different lender for each payment. But doing that is illogical and possibly quite a hassle. The important point to note is that since your payments to the developer is progressive, the mortgage housing loan that you take up is also disbursed portion by portion. This means that the money is release slowly to match the agreed payment schedule. When this is taken into account, you might only be starting to service your loan 1 year after your purchase. The installments that you will repay will also be based on the amount that have been released. So you will not be servicing the loan in it full entirety in the early years after buying your BUC condo. If you choose to take a mortgage with a lock in period, the lock in period will only start to run down from the first disbursement.
As the majority of condo new launch buyers will take up the maximum loan quantum that they can get, you must also be aware that the loan size you will be eligible for will most likely be your purchase price less the discounts, stamp duty rebates, cash back and vouchers that will be given to you. This means that if you are requesting a 80% loan for a $1m property, you will not necessarily be able to get a $800k mortgage. Just for example, $50k worth of goodies may be taken off the $1m buying price. Meaning you will be able to loan 80% of $950k instead of $1m. This is unique to BUC properties. Getting 80% is also not an entitlement. You will be subject to credit assessment and income stress tests when evaluation your application.
Now to the choices of loans. There are typically 3 types of loans that are most popular for under construction properties whether it is private or HDB.
1) Loans with low thereafter rates
2) Loans with low initial rates but higher thereafter rates
3) Fixed rate loans
There is a forth type of loan that are variable rate loans which are pegged to the lending bank’s internal board rates. Because those are unpopular and less transparent, we will not go into it. Here is a simplified example to show the comparison of the 3 types of loans mentioned above.
|Lock in||Nil||Nil||3 year|
|Year 1||SIBOR + 0.75%||SIBOR + 0.70%||Fixed 1.25%|
|Year 2||SIBOR + 0.75%||SIBOR + 0.70%||Fixed 1.25%|
|Year 3||SIBOR + 0.75%||SIBOR + 0.70%||Fixed 1.25%|
|Thereafter||SIBOR + 0.75%||SIBOR + 1%||SIBOR + 1.25%|
If you take a look at the table above and compare, it becomes abundantly clear that if you are a long term planner, you will no doubt take up the loan 1 which has a consistent rate and lowest thereafter rates. If you are only looking at the short term, you would choose loan 2 which has the lowest rates in the initial years. Whereas if you have a risk adverse profile, you will want to take up loan 3 with fixed rates so that you can plan you personal finances much more accurately.
Considerations for each loan
Loans with low thereafter rates. There is no doubt that the longer tenor term you take up for your home loan, the more attractive this deal is especially if we are in a market with rising interest rates. The low spread over all the years of the loan will be locked in no matter how high interest spreads rise in future. The even better thing is if interest rates are to fall in future, you will have the option to refinance your mortgage.
Loans with low initial rates but higher thereafter rates. A huge number of property buyers take up housing loans with low initial rates. These are usually investors who are buying more for financial gains rather than to live in for the long term. A loan with 3 years of low rates work pretty well for an investor who has already planned to hold onto the property for 3 years. Home buyers who take up these types of rates may also be planning to refinance after the initial years of low spread. However, you must take note that refinancing only makes logical mortgage sense in a market with declining interest rates. If rates are rising until the time when you refinance, you might very well find home loan rates being much higher than what you are paying at that moment in time. When that happens, it will indeed make absolutely no sense at all to consider refinancing. We have yet to even factor in closing costs of refinancing which will include legal fees without subsidies.
Fixed rate loans. When fixed rate mortgages are taken up, they are usually higher rates than floating SIBOR/SOR housing loans. This is because the lender has to be compensated for the risk that they take. Risk being that interest rates could be higher than your fixed rates in future. This will mean opportunity costs for lenders. You will however be able to plan your personal finances more meticulously as you will know exactly what you are paying for your home loan. You might have also read about 25 year fixed rates on the internet. There are no such loans in Singapore.
If you are an investor or speculator, you may want to take note that newer launches are projecting up to 5 years before the project TOP. For example, Riversails is estimated to TOP in late 2017. This can be due to the property cooling measures or because of costs and resources constraints. It could therefore be just about time the stamp duty policies favor you as a seller. This also means that your under construction property will not become a completed property until then. Do a check on the completed or uncompleted status of your property before refinancing. You can read up our guide on refinancing here.
Buying properties is not something you do every other day. So it is understandable if you do not track housing loan rates on a daily basis. If you need help on finding or selecting the best home loans for your under construction new launch condominium property, you can easily contact us from the contact form on our home page.
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