Tuesday, August 14, 2012

50-year housing loan: Down the Californian road?

Longer mortgage tenures could have adverse implications for the property market, borrowers and banks if it becomes more widespread.

Deputy Prime Minister Tharman Shanmugaratnam gave the assessment in a written reply to Parliament on Monday.

He added that the government will continue to closely monitor the property market.

Stretching a home loan out over 50 years does translate to a lower monthly instalment. But this is just an illusion of affordability.

Mr Tharman said that the borrower ends up paying more interest. The repayment period could also stretch past the retirement age, when the borrower may no longer have a steady income stream.

According to analysts, the higher interest rate on a longer term loan would mean that loan repayment can be easily be 20% more in the long run, compared to taking a 30-year loan.

The government said it will monitor mortgage tenure in the context of how banks structure their mortgage products, as well as banks' underwriting standards.

Still, analysts said the government is wary such loans could fuel speculative buying and undo its efforts to cool the property market.

Alfred Chan, director, Financial Institutions, Fitch Ratings, said: "Had property prices not been where they are, let's say (if) they were to be increasing at a more moderate pace, I think affordability wouldn't be an issue and banks wouldn't need to go out that aggressively to offer 50-year loan tenors."

Analysts added that the move to offer 50-year tenor loans also reflects the stiff competition among banks.

Loan yields in Singapore are at 2% compared to emerging markets like Indonesia, with 6%.

Timothy Kua, director, SmartLoans.sg, said: "I don't think the property market has cooled very significantly. It is still fairly healthy and UOB's 50-year loan tenor is probably more of an inter-bank competitive move to try and win over a bigger chunk of the mortgage market."

The government said its cooling measures in recent years have helped reduce the risk of a sharp escalation in property prices.

Still, it has cause for concern.

Fifty-year tenor loans first appeared six years ago in California, driven by sky-rocketing home prices.

California now has the second-highest foreclosure rate in the United States as of last July. According to reports, its foreclosure rate is one in every 239 households.
Source:  Channel News Asia

It seems that whenever property prices are shooting through the roof, 50-year tenor loans start to surface. This happened not only in California but Japan and Spain as well... which eventually contributed to bursting the housing bubble in each case.

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