Home loan fact sheet: Do more than state facts

Many home buyers do not fully understand the risks when they over-stretch themselves to buy their dream home.

From time to time, you hear of genuine prospective buyers who face great difficulty surmounting the higher loan-to-value ratio. If they can barely overcome the first hurdle, how much more difficulty will they have in meeting mortgage payments when interest rates shoot up?

The proposal by the Monetary Authority of Singapore (MAS) for banks to issue a two-page standardised fact sheet which draws up different scenarios, so that borrowers can clearly see the impact of an interest rate rise, is more than timely. I would say it is overdue. Such a proposal should have been mooted a long time ago when the banks started to encourage borrowers to switch to floating rate housing loans.

More than the “perfect storm” expected by some property experts in 2013 – where all the ingredients of oversupply, falling demand and higher interest rates occur at the same time – a sharp and rapid hike in housing loan rates in the not-too-distant future could crash the market long before that year.

As the low-interest rate environment has prevailed for so long – since January 2009 – many property buyers have come to regard it as the new norm. It does not help that the expected rate rise never seems to materialise, or keeps getting postponed indefinitely.

It is great to have all the important facts upfront in a standardised format that also allows for easy comparison but it should do more than that. There should also be some notes to explain what is it that drives our interest rates? Why is it that our rates track those in the United States very closely? And what should borrowers look for in news reports that they can read for themselves to understand possible future trends in our own interest rates.

A few weeks ago, many banking analysts were predicting a rise in interest rates in Singapore before the end of this year. But according to recent international media reports, many economists are now of the view that the US economic slowdown would mean the Federal Reserve will not start raising rates until the middle of next year, about six months later than many thought when the year began.

My fear is that if we keep crying wolf – warning that interest rates cannot remain low forever – without a proper explanation, the advice will eventually go in one ear and out the other. Without a proper understanding, it is also easier for home loan bankers at the marketing level to admit to the risks but say that such an event is unlikely to happen anytime soon.

That is probably what happened with the Lehman mini-bonds saga. The reasoning would likely be as follows: Yes, there is a risk but a small one because it is simply inconceivable that a huge US bank can collapse overnight. We now know what happened.

On another matter, the latest Design, Build and Sell Scheme (DBSS) project, Centrale 8, in Tampines has created a huge public outcry. This has led the Ministry of National Development to issue a statement to say that the scheme is under review. Some analysts have called for it to be scrapped altogether. However, there have also been letters to the press supporting the scheme.

If the purpose of the DBSS is to introduce a greater variety of designs and provide more choice, then I believe there is still a place for the scheme. The choice of a suitable location is critical because too good a site would attract too much demand, and in a rising market, the consequences are clear.

A less central but not too unattractive location to attract participation from the private sector may be a better choice. Then the demand will be a lot more for the different designs rather than for location.

Finally, it would be interesting to find out what is the main motivation of the 1,431 applicants who have applied to buy flats at Centrale 8 and not elsewhere or older private housing. I hope the authorities do a survey as this will help to plug the information gap.

By Colin Tan – head, research and consultancy at Chesterton Suntec International

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