3 golden property rules Singaporeans must know by heart

Just to make sure mortgage is paid.

According to PropertyGuru, mortgage rates in Singapore are largely determined by the existing Swap Offer Rate (SOR) and Singapore Interbank Offer Rate (SIBOR). Of these two rates, the SOR is influenced by the situation in the US.

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Fortunately with the Federal Reserve committing to a low interest rate of 0.25%, LoanGuru expects the city-state’s interest rates to remain low until 2014 at the very least.

On top of that, the Singapore government is monitoring the situation, as indicated by the latest cooling measures introduced in view of the hot property market. However, LoanGuru believes not all buyers are prudent with their home purchases.

According to transaction data for Q3 2012, the majority of deals during the period involved completed properties and the bulk of purchases were from the condo segment.

Hence, LoanGuru has come to the conclusion that buyers preferred completed private condominiums during the quarter. Moreover, based on LoanGuru’s mortgage data for Q3, we see a healthy distribution of the consumer profile across private condominium, landed, EC and HDB segments.

One of the methods used by banks to measure the ratio of total liabilities over income is the Debt Servicing Ratio (DSR). For example, if a new property purchase results in a monthly instalment of S$2,703 and the combined income of the borrower is S$7,950 per month, the resulting DSR is 34%, meaning the DSR is manageable and the borrower will not have a hard time servicing the loan.

A DSR below 30% is considered healthy, whereas a 30 to 40% DSR is still manageable. On the other hand, a DSR of 40 to 50% denotes that a borrower may have a hard time paying off the loan.

Additionally, a DSR above 50% is considered very risky as more than half the monthly household income is consumed by mortgage instalments. Aside from that, if the interest rate rises by two-fold from its current level, borrowers will be facing the same situation three years back. At that time, the DSR for all segments was healthy except for condo and HDB flat owners. If this happens, borrowers from those two segments will need to examine their finances.

Should mortgage interest rates increase by four-fold, the DSR of borrowers from all segments will exceed 50%, except for landed property owners. This situation happened back in 2003, whereby interest rates of loans ranged from 3.25 to 4.75%.

Notably, borrowers were heavily burdened by their monthly instalments during that time. If we look back at the 1995-1997 period just before the property bubble burst, we would notice that the interest rates at the time were eight times the present level at 8 to 9%. As such, the DSR for all segments easily breached the 50% mark. Notably, the DSR for HDB owners was at 101%.

These scenarios happened in the past and are factual. The prevailing low interest rate environment in Singapore will not last forever. So take action now and be prepared. If you want to buy a completed condominium or HDB flat, you will need to plan your home loan solution right now.

This also applies to buyers of uncompleted condo units, but their loan packages are more complicated due to the normal progressive payment scheme.

While buyer mindsets have changed over the years, the golden rules for property purchases remain constant. First, borrowers should always set aside more than enough (24 times) for their monthly instalments either in cash or CPF contribution. If an economy downturn happens, this ensures that they will have an emergency fund to pay off their mortgage.

The second important rule is to always buy a property within your means. If you over commit now, you will be overburdened with your mortgage instalments if an economic crisis happens, and this will diminish the amount of money available for your family’s other needs.

Lastly, always choose a mortgage package that meets your needs. If you are a risk taker, you can consider a SOR or SIBOR package to take advantage of the low interest rate environment at present.

If you are a risk-averse person, you may consider a fixed-rate loan. However, fixed-rate loans are not suitable for all property segments.