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That new HSBC loan: too clever by half?

Posted by luxuryasiahome on November 6, 2009

Why not give customers the money outright?

LAST Friday, when given the HSBC press release on its new Sibor plus equity-linked mortgage, I spent at least 15 minutes trying to figure out how it worked. The result was that I was so consumed with the promise of thousands of dollars that I paid no attention to the home loan itself.

Eventually, I had to swallow my pride and talk to an HSBC executive to understand how taking a mortgage from HSBC would put money in my pocket. The idea was quite simple: a borrower could get potential cash rebates based on an equity index over a 24-month period.

The rebate is 0.25 per cent of the outstanding loan amount. This index has to hit or exceed 130 per cent of a specified barrier level on each valuation date, which occurs on the first trading day of every quarter for a borrower to hit pay dirt. At the inception date of the equity-linked home loan on Nov 2, 2009, the barrier point index is 315.50.

Hence, on the first trading day of each quarter, commencing April 2010, if the index is more than 410.15 (being 130 per cent of 315.50) in the official closing for that day, the customer will receive a cash rebate of 0.25 per cent of the loan outstanding; if the index is less than 410.15, no cash rebate will be given. HSBC said that while the customer may get nothing, no one loses any money; it’s essentially giving borrowers a lottery ticket.

Beware the ‘Shell effect’, though: potential gains could be wiped out if interest rates jump next year and the stock market tanks, as central banks rein in liquidity and the bank ends up with moody customers.

Or stock markets move in a volatile manner and crash on the valuation day, putting home loan borrowers on edge – one day thinking they were getting $1,500, and the next day seeing it evaporate. The $1,500 possible rebate per quarter is an example given by the bank based on a $600,000 loan.

Or if the gimmick works too well and the bank ends up paying out huge amounts of cash rebates, will shareholders then suffer? And is it really a ‘free’ gamble for those who have a bullish view of the stock market?

Obviously, some bright spark worked on creating the promotion, after which the bank’s relationship managers had to be trained to explain it to customers, all of which involved some costs – money which could have been better used by just giving it to customers, one would think.

To protect the risk to the bank – in case the index does exceed the 130 per cent level every quarter – presumably HSBC has bought some kind of insurance.

It’s pretty serious money; it’s like paying a maximum 2 per cent – which is much, much more than what the bank pays fixed depositors.

It’s understandable why HSBC thought up the promotion. Mortgages are very boring products, and it is difficult to compete or lure customers without giving them something. Banks have often found themselves slashing prices in order to compete – and that’s not desirable as it can become a vicious spiral downwards in terms of profits.

So what’s the real idea behind the promotion? If it’s to give money to customers to entice them to sign up for the mortgage, why not give it to them outright? Just pay it every quarter over the same 24-month period to keep the customer from jumping ship.

After all, everyone understands money.

Source : Business Times – 6 Nov 2009

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HSBC equity-linked loan with cash rebates

Posted by luxuryasiahome on November 2, 2009

HOME buyers can now take a punt on the stock market while diving into the resurgent property market.

HSBC is launching today an equity-linked home loan package that also offers cash rebates to its customers – a first in Singapore.

It will give all new and existing HSBC Premier customers in Singapore a chance to enjoy quarterly cash rebates over a period of two years if a certain stock index that it is linked to does well.

A minimum loan size of $200,000 is needed.

The package – which applies to both new and refinancing loans – is tied to the Morgan Stanley Capital International Singapore Free Index, which currently tracks 27 stocks, including those of the three local banks, the Singapore Exchange and Singapore Press Holdings.

Under the package, which does not come with a lock-in period, customers will pay an interest rate pegged to the three-month Singapore Interbank Offered Rate (Sibor) plus 1.1 per cent throughout the loan tenure.

A cash rebate amounting to 0.25 per cent of the loan outstanding will be granted in each quarter if the index reaches or exceeds 130 per cent of a specified barrier level on each valuation date.

This specified barrier level refers to the value of the index when the market closes today.

Come valuation time, if the index closes below 130 per cent of today’s level, no rebate will be paid. Customers do not need to bear any costs should that happen.

Valuation is scheduled for the first trading day of every quarter, so the first valuation exercise would take place in April.

To illustrate, let’s assume the index closes at 320 points today.

A customer who takes up this package will pocket a rebate if, on the valuation date, the index outperforms the benchmark by at least 30 per cent, that is, it rises to – or above – 416 points.

For a $600,000 home loan with a 20-year term, the customer stands to receive total cash rebates of up to a maximum of $11,389 over the two years, HSBC said.

Financial advisers say that an interest rate equivalent to Sibor plus 1.1 per cent is not unreasonable and is quite ‘in line with the market’.

Mr Geoffrey Ying, who heads the mortgage division at financial advisory firm New Independent, noted that global equity markets are trending up because of cheap funds, brought about by central bank actions around the world.

‘This will also make the attainment of that 0.25 per cent rebate that much easier,’ he argued.

Standard Chartered Singapore’s general manager for retail banking products, Mr Dennis Khoo, said that since there is no guarantee of any return, Singapore customers might not be that keen as they are known for their practicality.

‘Stanchart will not follow suit,’ he said. ‘Our strategy is to price competitively, but differentiate ourselves through our wide range of mortgage loan products and vital services…and the advice we offer to home buyers.’

HSBC’s new home loan offer is available until Nov 30. To qualify for HSBC Premier, customers must maintain a total relationship balance of at least $200,000 with the bank.

Source : Straits Times – 2 Nov 2009

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HSBC unveils equity-linked home loan

Posted by luxuryasiahome on November 2, 2009

HSBC has unveiled a first-in-the-market equity-linked home loan package in which customers could receive quarterly cash rebates over two years – at no additional cost.

There is also no lock-in period for the new package – and cash rebates given out are not subject to claw back if the home loan is redeemed, the bank said in a media release.

The loan package, open to all new and existing HSBC Premier customers in Singapore, charges an interest rate of Sibor+1.1 per cent throughout the loan tenure, but also offers the opportunity to receive potential cash rebates for two years.

The cash rebate will be granted in each quarter if the equity index to which the home loan package is pegged – in this case, the Morgan Stanley Capital International Singapore Free Index (SGY) – hits or exceeds 130 per cent of a specified barrier level on each valuation date. This occurs on the first trading day of every quarter.

Eligible customers will then receive in that quarter a cash rebate of 0.25 per cent of their outstanding loan, which will be credited into their home loan repayment account.

If the SGY index closes below 130 per cent of the barrier level on each valuation date, no cash rebate will be paid out.

Either way, HSBC said there will not be any cost to customers relating to the performance of the index.

Sebastian Arcuri, head of HSBC Singapore’s personal financial services, said the package was designed to ‘recognise and reward’ customers for their dedicated relationship with the bank.

‘Through this new and innovative home loan offer, we want to enable them to capitalise on market opportunities and earn potential cash rebates on their home loans, which they can use in any way they want,’ he said. ‘We’re confident that this initiative will further strengthen the HSBC Premier proposition and give our Premier customers even more value and reasons to bank with us.’

The package is applicable to both new and refinancing loans for completed properties with a temporary occupation permit obtained with a minimum loan of $200,000.

‘With the economy showing signs of improvement, our new proposition may prove to be a timely opportunity for customers to benefit from the recovering equity market,’ said Mr Arcuri.

Source : Business Times – 2 Nov 2009

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Incentives abound for home buyers looking for property loans

Posted by luxuryasiahome on October 17, 2009

Some banks are rolling out new services and attractive mortgage packages to increase their market share in the private housing loan sector.

Banks such as Standard Chartered has set up a service counter to offer loan evaluations at show flats.

Said Dennis Khoo, general manager of Wealth Management Consumer Banking at Standard Chartered Bank: “I think it’s even better prudence because before (a buyer) puts down the money, he can quickly – within 15 minutes – check, and then go and put the money down knowing that he’s making a good decision.”

The mortgage war among the banks has seen interest rates being revised downwards.

However, the lowering of rates is not the only weapon. Some banks are also trying to gain a greater market share by providing incentives such as air tickets and dining vouchers.

Said Ang Tang Chor, senior executive vice president of Consumer Business at Hong Leong Finance: “We do not only compete in interest rates, we also have what Singaporeans like… (such as) travel, as well as eating at various outlets in Singapore.”

But despite the incentives, home buyers say low interest rates remain the most important factor.

Source : Channel NewsAsia – 17 Oct 2009

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Lenders try new ways to woo home buyers

Posted by luxuryasiahome on October 17, 2009

THE surge in home sales is prompting two lenders to try new marketing approaches to snare a share of the fiercely competitive mortgage market.

Tried-and-tested strategies like launching more innovative mortgage products and offering better interest rates are now standard procedures.

But some lenders are also trying more radical ways to lure borrowers – like product giveaways, snazzy marketing and that extra bit of service.

‘Banks can cut rates only up to a certain level. They have to come up with more innovative ways to attract customers,’ said Ngee Ann Polytechnic real estate lecturer Nicholas Mak.

Standard Chartered and Hong Leong Finance (HLF) are both looking for an edge with new products and approaches.

StanChart has just launched its Approval-in-Principle service initiative aimed at people in property showrooms. Potential buyers will be able to obtain in-principle approval, including advice on loan size and tenor, in just 15 minutes. All they have to do is to provide the bank official with some basic information, including their monthly income and financial commitments.

As these numbers are ’self-declared’, the loan is approved only after the necessary documentation is presented and checks are done.

The StanChart service will be on offer this weekend at Far East Organization’s Mi Casa showflat, a condominium development in Choa Chu Kang town centre.

‘Banking is about service,’ StanChart’s general manager for wealth management Dennis Khoo told The Straits Times. He said the service will give customers peace of mind knowing how much they can borrow.

‘If I know with a good level of certainty that my loan would be approved, I can go ahead to issue the cheque deposit for my option to purchase,’ he added.

IT professional Calvin Chin, who is considering buying a property, called StanChart’s new service a convenience, but observed that ‘for a bank to be at the showroom, it looks like the start of a home-loan marketing war’.

StanChart has also launched Mortgage Protector, a bundle comprising a two- year fixed-rate package at a 2.4 per cent interest rate, with an insurance plan that provides total coverage for the entire loan amount from the onset.

Customers who sign up will get a Visa Platinum Card with a three-year waiver of annual fees and $50 cash back.

HLF has taken another route by becoming the first finance company here to collaborate with Singapore Airlines. If a person takes a $200,000 loan with HLF, for instance, he can get either 3,000 KrisFlyer miles or $200 worth of food and beverage vouchers. A higher loan value means more air miles or more vouchers.

‘We want to extend an extra-special treat to our customers to help celebrate the excitement of a property purchase,’ said HLF president Ian Macdonald.

Bank officers at rival lenders advise people not to be swayed by marketing ploys but to look at factors such as how the rates are determined, the type of flexibility available to make repayments and the commitment period.

OCBC Bank’s head of consumer secured lending, Mr Gregory Chan, said: ‘While best pricing and marketing gimmicks support a promotional drive, consumers in our matured market are discerning and most will select a bank based on a combination of appropriate package and engagement experience.’

Mr Leong Sze Hian, president of the Society of Financial Service Professionals, recalled that decades ago, banks frequently dangled treats when consumers signed up for home loans.

But the practice died out after the banks took much flak from industry participants as these giveaways influenced consumers to base their decisions ‘on freebies rather than choosing a home loan based on the merits of the loan’.

Source : Straits Times – 17 Oct 2009

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Stanchart offers loan approval at the showflat

Posted by luxuryasiahome on October 17, 2009

STANDARD Chartered Bank yesterday announced a new service initiative at property showflats through which potential homebuyers will be able to obtain in-principle approval and advice on housing loan quantum and tenor in as little as 15 minutes.

To kick-start the service, it will be offered as a value-added feature this weekend at Mi Casa in Choa Chu Kang. The bank said it is the first in the industry to offer such a service.

Developer Far East Organization will release two new towers at the 457-unit Mi Casa, where the take-up rate has been good since sales started in March.

Stanchart said it will be able to offer loan approval in principle in 15-60 minutes if customers provide basic information such as monthly income and other financial commitments, without official documents. They can then follow up by sending their documents to the bank, which can grant actual approval in as little as two days.

‘If customers see a unit they like and want to book it before others see it, they want to know how much they can borrow and for how long,’ said Dennis Khoo, Stanchart’s general manager for retail banking products.

Stanchart has also introduced a new mortgage offering – Mortgage Protector, a bundle of a two-year fixed-rate package at 2.4 per cent with MortgageCover, a single-premium mortgage-reducing term assurance plan for two years.

Mr Khoo said that through approval in principle and the mortgage protector bundle, it aims to offer a seamless loan application process.

Source : Business Times – 17 Oct 2009

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Making sense of home loans

Posted by luxuryasiahome on September 24, 2009

We survey what’s on offer by major banks and discuss key features of the packages. By FELDA CHAY and SIOW LI SEN

WITH the recent home buying spree, one pertinent issue is how to pick the best home loan from among the dozens on the market. What with all the different plans and reams of fine print to go through, the search for the right home loan can often be a headache. Here, online websites can be a boon by making comparison of features easier. Check out smartloans.sg which has details of home loan packages from eight banks – HSBC, Standard Chartered, Rashid Hussein Bank (RHB), Maybank, UOB, OCBC, POSB and DBS.

The fixed rate package from Stanchart and floating rate package from HSBC are currently the most popular among users of the website. And it is constantly trying to add new banks to the list, with talks now ongoing with Citibank Singapore. Smartloans.sg’s chief executive Vinod Nair says he expects the bank’s packages to be listed on the website soon.

While the large variety of loan schemes available may leave many house buyers confused, Mr Nair says that there are a few things to keep in mind. ‘It depends on why you are buying the property. If you are buying it for investment purposes, you should take the floating packages because there are usually no lock-ins for floating rate packages. Also, they are usually pegged to rates like Singapore Interbank Offered Rate (Sibor), which should remain fairly low in the next one to two years,’ he says.

‘If you are planning on taking on a long-term tenure for your own occupation, it might be better to take up fixed rate packages, which offer greater comfort to borrowers because of the certainty it provides. Also, most people usually refinance their mortgages, so as long as you refinance your loan every three years to ensure that you get the best rates, it should be worth it.’

BT asked some of the banks about their most popular home loan packages and their features.

Citibank: Sherry Leong, Citibank Singapore business head for home financial services, says its Citibank Home Saver has always been a popular choice with clients. Home Saver is an index-linked home loan that offers borrowers the widest selection of index tenors in the market – from one-month to three years. The indexes linked to its loans include the one-month and 12-month Sibor.

Clients also have the flexibility to switch from one tenor to another on the maturity date, enabling them to decide on fixed or floating rates, depending on their view of interest rate trends, she says.

For instance, clients can take advantage of the low one-month Sibor now and then change to a 12-month Sibor later if they feel that interest rates are likely to rise, thereby fixing the rate on their instalments for that period. In addition, Home Saver comes with an interest-offset feature that helps borrowers pay down their home loans faster. Clients can put deposits into the offset account to earn an adjustment currently at up to 70 per cent of their home loan rate. This adjustment reduces the interest payable on the home loan, thereby helping clients reduce their principal outstanding faster. The offset account is an all-in-one home loan, checking and deposit account with a debit card.

‘Our clients also tend to use this as their main salary and transaction account to maximise their benefits from this feature. This feature will also appeal to customers who may have cash in hand but don’t want to commit all of it to a property in case funds are needed for other investments,’ says Ms Leong.

For owner occupied property, the maximum financing is 90 per cent though Citibank customers usually borrow up to 80 per cent, she said. Investment buyers, depending on their profiles, need to pay between 20 and 30 per cent cash downpayment, she said.

On valuations, Ms Leong says the bank noted that new launches command a slight premium above older properties and this is particularly telling when the property is leasehold.

HSBC: At HSBC, the leading home loan which is available till Sept 30 is its relationship-based package with an attractive interest rate of Sibor plus one per cent throughout the loan tenor. It is on offer to all existing HSBC customers as well as new customers who start banking with them. There is no lock-in period for the package.

This package comes with deals and discounts in recognition of customers’ relationship with the bank, said Sebastian Arcuri, HSBC’s head of personal financial services. ‘We are the only bank in the market to adopt a relationship-based approach that rewards customers for maintaining their relationship with the bank,’ he says.

Their Sibor-pegged loyalty and relationship-based Sibor packages are the most popular, with 90 per cent of home loan customers choosing these packages. Its Sibor- pegged loyalty package rewards customers for keeping their home loan with HSBC, by offering them a year-on- year decrease in the interest rate spread charged in the first three years.

Maybank: While the current economic climate seems to favour floating rate packages, Maybank Singapore says that its three-year fixed rate package is still preferred by its clients as it offers them peace of mind.

For its three-year fixed rate promotional package, the bank offers a fixed rate from as low as 1.6 per cent, after which the rates will be pegged to the Singapore residential financing rate (SRFR), which is currently 3.75 per cent. This applies to both completed and uncompleted properties, and HDB and private residential properties. There is no minimum loan quantum. Maybank offers free one-time repricing to its prevailing home loan packages, normally not found in fixed-rate loan packages in the market.

‘As property purchase is a long-term commitment, we would advise customers to take a long-term view and go for regular instalment payment comprising principal and interest payment. This is also in view of the relatively low interest rate environment currently,’ says Maybank’s head of consumer banking Helen Neo.

OCBC: Packages offered by banks come in two forms: fixed rate and floating rate. For fixed rate packages, the interest rates are fixed for the first few years of the loan. The interest rates generally tend to be higher than those of variable rate packages, says OCBC’s head of consumer secured lending Gregory Chan. The benefit is the protection it can offer against future interest rate hikes.

Floating rate packages are pegged to the bank’s respective reference rate – typically influenced by the prevailing market conditions – and banks can change the rates at their sole discretion. ‘Such packages generally lag behind interbank rate movements and are relatively less volatile compared to market pegged packages such as Sibor or Swap Offer Rate (SOR) pegged packages,’ says Mr Chan.

‘For investors who do not intend to keep the home loan for an extended period, they may prefer floating rate home loans as compared to fixed rate home loans, which come with pre-payment penalties for early settlement and partial pre-payments,’ says Mr Chan. ‘Hence, the final decision lies with the preference and interest rate outlook of home buyers.’

Currently, the floating rate packages such as the SOR- pegged home loans are preferred over the fixed rate packages at OCBC given the low interbank rates currently, and the depressed outlook for the rates in the medium term. The bank offers up to 90 per cent for financing of property purchases – though at higher rates compared with financing 80 per cent of a home.

Stanchart: The bank has a variety of Sibor-linked, fixed rate and floating rate packages, including MortgageOne Sibor and MortgageOne Optimizer that provide an offset feature where customers can use the interest earned on their deposits to reduce the interest payable on their home loans.

In the last two months, more than 50 per cent of their customers took up the fixed rate packages, including the 1.5 per cent one-year fixed rate package introduced in conjunction with the bank’s 150th anniversary, says Dennis Khoo, general manager, retail banking, Standard Chartered Bank, Singapore.

‘We also see strong interest in the three-month Sibor- based packages as customers prefer interest rate transparency and enjoy the flexibility of making repayment anytime without any lock-in period,’ he says.

He advises home owners to look at mortgage insurance as well. ‘A mortgage is the single largest financial commitment for many Singaporeans and it is important that we accord the same value, if not more, in protecting our homes, as much as in purchasing and building them,’ says Mr Khoo. ‘Customers should consider signing up for a mortgage reducing term assurance (MRTA) plan as it provides protection and gives them peace of mind when planning for a home purchase and the future.’

The bank offers both single-premium and regular premium MRTA plans. MortgageCover, a single-premium MRTA plan, offers a convenient and affordable solution as customers can choose to finance the single premium together with their mortgage loan, without the need to maintain a separate insurance plan or payment plan.

The insurance plan provides customers coverage for the entire loan amount from the onset and will help to alleviate the financial and emotional burden of the home owner and his family in the event of an unforeseen event. Customers also have the option of a regular-premium MRTA plan, Mortgage Protect, if they prefer flexibility in payment to match their cash flow.

UOB: SOR packages are popular at UOB currently, says the head of its loans division, Chia Siew Cheng. Its promotional one-month SOR with one-year constant monthly instalment plan, for instance, allows customers to fix their monthly instalment for a year, regardless of interest rate movements.

Customers can continue to fix their monthly instalment for a one-year period for subsequent years as the constant monthly instalment will be re-computed based on the remaining tenor and interest rates. ‘If interest rates move up, customers can be assured that their monthly cash flow will not be disrupted. If interest rates decline, customers can pay off more of the principal amount,’ says Ms Chia.

Another popular package is UOB HomePlus, which allows customers to earn the same interest rates on their deposits in a UOB i-Account of up to 75 per cent of the amount the bank loans to the customer. This gives its customers the option to use the deposit interest earned to offset the interest they have to pay for their loans.

UOB currently has a promotional HomePlus package, which offers rates with deposit interest matching of up to 33 per cent of the amount on loan to a client. ‘Depending on the deposit amount maintained in the UOB i-Account, the implied interest rate payable for a customer’s loan can be as low as one per cent per annum in the first year and up to 3 per cent per annum in the third year,’ says Ms Chia. UOB finances up to 90 per cent of the purchase price or valuation price of the property – whichever is lower – for owner occupation purposes.

Source : Business Times – 24 Sep 2009

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IAS: banks calm, but analyst says they’ll take a hit

Posted by luxuryasiahome on September 16, 2009

Banks here seem to have shrugged off the government’s announcement on Monday that the interest absorption scheme (IAS) will be banned with immediate effect, but analysts are less sanguine.

Lower home sales and the resulting slowdown in housing loans growth could hit the three local banks’ profits, analysts said. There could also be a ripple effect in the form of a drop-off in loans made to developers and builders.

Banks told BT that the government’s decision to disallow the IAS and the similar interest-only housing loans (IOL) with immediate effect will not hurt them too badly.

‘While the take-up rate for IAS is good, our normal progressive home loan packages are actually more attractive and popular with homebuyers,’ said United Overseas Bank’s (UOB) head of loans division Chia Siew Cheng. ‘These measures (the ban of IAS and IOL) are not likely to have a significant impact on the bank’s loan business as most customers have opted for the normal progressive loan scheme, which is more attractive.’

But Royal Bank of Scotland (RBS) analyst Trevor Kalcic expects the earnings of the three local banks to be reduced by around 0.5 per cent though a negative impact on both volumes and margins.

‘On the volume front: the scrapping of the IAS could squeeze out marginal buyers,’ he said in a report. ‘Banks do not disclose sales under IAS, but several developers have said that IAS sales amount to about 30 per cent of total sales. Assuming that about 30 per cent of these are marginal buyers who would opt only for IAS or nothing, then neutralising these sales reduces our FY10F and FY11F Singapore system loan growth numbers of 2.5 per cent and 3.5 per cent respectively by less than 0.5 per cent.’

A check by BT found that interest in the scheme has been on the wane in recent months. In some projects, as many as 40-50 per cent of units were bought using the IAS scheme, in others it was less than 5 per cent.

Mr Kalcic also added that if the government measures led to a fall in property prices, then it would have a further negative impact on volume.

‘We expect that there will be a knee-jerk res- ponse from potential homebuyers to this announcement, resulting in a slowdown of number of new transactions in the short term,’ said Gregory Chan, OCBC Bank’s head of consumer secured lending.

‘Whether property transactions will be curtailed on a sustained basis will depend on other macro factors such as property supply and demand, economic recovery and developers’ pricing,’ he added.

On the margin front, banks charge developers an interest rate for offering the IAS scheme, which is higher than the retail mortgage rate. ‘Hence, scrapping the IAS will have a negative impact on incremental net interest margin and revenue,’ Mr Kalcic added.

Credit expansion here has been struggling since the beginning of the year, propped up only by home loans. Year-to-date, total bank lending at end-July dipped 0.1 per cent, weighed down by a 2.4 per cent contraction in building and construction loans but offset by a 6 per cent growth in home loans.

Bankers also told BT that their loans to developers are not at risk.

A UOB spokeswoman said most residential project launches have seen strong sales. ‘The sale proceeds collectible are sufficient to complete the construction of the developments as well as fully repay the loans,’ she said.

And for the unlaunched projects, the bank’s main exposure is in the mass market and mid-range segment, where prices have moved in tandem with underlying demand from genuine homebuyers.

‘In addition, we have done numerous stress tests on the portfolio which indicated that the security coverage and debt-servicing coverage ratio are sufficiently robust to withstand the impact of a major price correction,’ she said.

Source : Business Times – 16 Sep 2009

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Don’t overlook mortgage insurance

Posted by yeshomes on September 10, 2009

RECENTLY, my client Mr Wong called me for mortgage insurance advice. He had just bought a semi-detached house for close to $2 million. He took a loan of $1.2 million over 15 years, and was looking for a mortgage reducing term insurance that will pay off his mortgage in case of his death or total and permanent disability (TPD) while the loan is not fully paid.

Mr Wong told me that he will never forget the time that he and his younger siblings lost their family home when his father died of a heart attack some 30 years ago, leaving his mother struggling to raise the four of them.

Certainly, he does not want this to happen to his homemaker wife and three children.  ‘When I pass away, the last thing that I would want to put my family through is to also lose the roof over their heads,’ he said.

In Singapore, mortgage insurance is not made compulsory for private property owners and those who are not using CPF to pay their monthly HDB housing loan repayments. However, the Home Protection Scheme, or HPS, is mandatory for HDB/HUDC flat owners who service their mortgage loans with CPF funds.

Many private property owners baulk at mortgage insurance either because of inertia or misconception that it’s an unnecessary cost. Without mortgage insurance coverage, however, life could be a lot harder financially for the family if things go wrong.

Over the past years, there have been newspaper reports on households having to surrender their private properties because the sole breadwinner passed away without mortgage insurance coverage. As such, I always advise my clients who own private properties to have mortgage insurance to protect their homes and families.

As the name implies, mortgage insurance safeguards your home and family against the unexpected, so that they will not be burdened with mortgage repayments or face the possibility of losing their home. It is available on a single or joint-life basis. If you and your spouse jointly own the home, you may want to consider a joint-life mortgage policy which pays out on the ‘first death’.

You can decide how long you want the policy to cover you, but most people have it to run concurrent with their mortgage.

The premium will increase with the mortgage size and the length of your term. In addition, age, gender and whether you smoke are big factors in determining how much you pay. Smokers pay a lot more than non-smokers, simply because they are more likely to make a claim. For example, based on the quotation from a local insurer, Mr Wong will need to pay around 40 per cent more if he were a smoker.

Most of the mortgage insurance plans are reducing coverage whereby the sum assured decreases annually and the rate of reduction depends on the mortgage interest rate and the policy term.

Some of the common benefits and features:

~ Total and permanent disability (TPD) coverage up to age 70. The policyholder will receive the sum assured in instalments or a lump sum up to $2 million upon diagnosis of TPD;
~ Single or joint-life coverage is available for joint homeowners;
~ Premium payment term usually stops a few years before the end of policy term, while you continue to enjoy the coverage;
~ Option to add waiver of premium rider so all future premiums will be waived upon diagnosis of one of the 30 critical illnesses;
~ Mortgage insurance does not normally cover critical illness, which means that in the event of a critical illness such as cancer, you will still need to pay the monthly mortgage repayments. Therefore, you may need to buy a separate policy for critical illness cover;
~ Most plans will not cover any disability caused by riot, civil commotion and terrorist activities.

Buying a home will likely be the largest undertaking you make in your lifetime, so protecting it should be a key part of your overall financial plan. Mortgage insurance will ensure that your dependants will not have the financial worry of trying to find the mortgage repayments or having to sell the property or downsizing in the event of your untimely death.

If you are looking for a mortgage insurance policy, do shop around as premium rates and features offered can vary greatly from insurer to insurer.

The writer is a Certified Financial Planner practitioner. The views expressed are his own

Source : Business Times – 10 Sep 2009

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10 things to note when shopping for a home loan

Posted by yeshomes on September 6, 2009

Coming up alongside the current property rally is a fierce competition among banks here, eager to sign up homebuyers with attractive and innovative loan packages.

The loan options being dangled are mind-boggling – such as the perennial choice between fixed or floating rate mortgages.

Some packages even come with a deposit interest matching feature where the interest earned can be offset against the mortgage interest.

Two examples are United Overseas Bank’s (UOB) HomePlus and Standard Chartered Bank’s (Stanchart) MortgageOne Sibor.

For instance, MortgageOne Sibor customers earn the same interest rate on two-thirds of their deposit linked to their mortgage as they pay on the loan. The interest earned can offset the mortgage interest.

Customers pay less interest each month, and are able to pay down their loans faster than is the case with a traditional loan package.

Citibank’s Home Saver deal is an index-linked home loan that offers customers one of the widest selections of index tenures in the market, ranging from one month to three years. Customers have the flexibility of switching from one index tenure to another. The indexes used for reference include the Singapore Inter-bank Offered Rate (Sibor).

If time is money, Stanchart has launched a service which provides in-principle approval for a mortgage loan within one hour – provided certain information like annual income and property valuation is made available.

Some experts even suggest that the conventional wisdom – that the best deal is the package with the lowest interest rate – is not always so.

‘The best loan package is the one that meets the needs of the home owner,’ said Ms Annie Lim, managing director of mortgage consultancy firm Global Creatif Financial.

Besides interest rates, consumers should look into such features as the lock-in period, penalties for partial redemption and legal fee subsidies.

Ms Lim’s own wish-list is a package with no lock-in period and no penalty for partial repayment.

‘I like the flexibility of not having to pay a penalty should I sell my property within the lock-in period, or to restructure my loan as my financial needs do change from time to time.

‘I also want to be able to choose partial repayment as and when I get any bonus or lump sum income,’ she said.

Here are 10 things to consider in a home loan:

1 Fixed or floating rate mortgages

Mr Dennis Khoo, Stanchart’s general manager for retail banking products, said customers who want security and stability should opt for a fixed-rate package as this is a good time to secure the pricing before interest rates rise.

‘With fixed interest rates, the monthly instalments are not open to fluctuations,’ he said.

But some other customers may believe that interest rates will fall or remain low.

For them, variable or floating interest rates are the preferred route, given that the payment amount automatically adjusts as rates go down – or up.

Customers typically link their loans to one of two major benchmark rates: Sibor and the Swap Offer Rate (SOR).

2 Sibor

Mr Dennis Ng, spokesman for mortgage consultancy portal www.HousingLoanSG.com, cautioned against the false notion that the Sibor will stay low at below 1 per cent.

He said it is likely to creep up as the economy recovers and when US interest rates are adjusted upwards.

‘The three-month Sibor is now at a low 0.68 per cent. This rate has been stable for the last six months. But do note that in 2007, Sibor was as high as 3.58 per cent.?

‘Sibor is mainly affected by the US Federal Reserve rate and the liquidity of Singapore’s banking system. The US is likely to keep interest rates low for the next six to 12 months,’ he said.

But two years from now, for instance, interest rates may go up. So do not calculate your ‘affordability’ based on current low housing loan interest rates, he advised.

3 Loans with interest-offset features

Ms Lim said customers with healthy monthly cashflows or initial lump sums parked in their savings accounts may want to check these out.

The deposits can be used to offset their loan account so that they pay only the loan interest on the difference, as in the case of Stanchart’s MortgageOne Optimizer.

Such an offset allows customers to lower their loan term without additional instalment payments, as offsetting minimises the loan payment.

4 Interest-only packages

These are available only for new loans, and on a case-by-case basis when customers decide to refinance.

Customers pay only the home loan interest and not any of the principal for a specified period, usually up to three years. In the fourth year, the loan reverts to a normal interest rate plus principal loan and follows the fourth-year rate of the package.

This option is targeted at the investor who wants to maximise bank financing for his property investments. It is also suitable for customers who may have temporary cashflow problems for a limited period, Ms Lim said.

5 Check out vacancy rates and rental rates

Investors who depend on rental income to pay their housing loan instalments should realise their property might go untenanted for up to six months. It is prudent to have enough cash or Central Provident Fund savings on tap to cover these monthly instalments.

Mr Ng noted that condominium rental rates are still falling. Investors should factor in a possible drop in rental income by 30 per cent to calculate the amount needed to top up any shortfall in rental against the loan instalments.

6 Penalties and fees

Customers should look beyond interest rates and consider other factors such as the lock-in period and penalty fees.

Some loans come with benefits including legal fee, valuation fee and fire insurance fee subsidies which are aimed at defraying part of consumers’ housing loan costs, said a UOB spokesman.

Another potential cost is the loan cancellation fee. An investor who bought a property speculatively and then applied for a loan might be slapped with a loan cancellation fee if the property is sold before the loan is disbursed.

Cancellation fees can range between 0.75 per cent and 1.5 per cent of the loan amount, and can be quite substantial. For example, if the loan amount is $1 million, the cancellation fee works out to $15,000, said Mr Ng.

7 Valuation

Do not assume that when you buy a newly launched property from the developer, you are free from having to check its market valuation.

Mr Ng understands that some new projects have been sold above valuers’ estimates. In such a case, you will have to use your own cash for the amount above what the property is valued at.

Say, a property is sold for $1 million but valuers reckon its market valuation to be $900,000. The $100,000 difference – known as cash-over-valuation (COV) – has to be paid by the buyer in cash.

Indeed, arising from the recent exuberance in the property market, the COV component is becoming more marked in private and public housing sales.

Ms Lim’s advice is to get an independent property valuation before committing to a sale price.

8 Debt servicing ratio requirement

To approve loans, banks typically use the debt servicing ratio – which is the percentage of one’s monthly income used to service long-term liabilities. The recommended healthy debt servicing ratio is about 35 per cent although every bank has different acceptable levels of debt servicing ratio.

Ms Lim recommends that young couples and first-time home owners apply for loans with the maximum quantum – usually 80 per cent of purchase price – and the maximum tenure. The latter is usually based on age 70 less the customer’s present age or 35 years, whichever is lower.

‘We recommend this in our practice to enable easier approvals of loans so that a healthy debt servicing ratio is achieved. Given the right package, the customer can always make future adjustments like doing partial repayments or shortening loan tenure,’ she said.

9 Have a buffer

Homeowners should have a buffer of at least 12 months’ funds to service the loan so that they have sufficient time to rent out or sell the property. This will come in handy if things turn bad, said Mr Bryan Ong, founder of mortgage consultant BC Group.

10 Mortgage insurance

Finally, that dream home may become a nightmare for your family if you fail to protect your investment with some mortgage insurance.

This safeguards your home, and family so that they will not be burdened with mortgage repayments or face the possibility of losing their home or downsizing should you die prematurely or become permanently disabled, said Mr Jason Ong, an adviser with Professional Investment Advisory Services.

Source : Straits Times – 6 Sep 2009

Email lushhome@gmail.com to speak to a professional home loan specialist.

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