Singaporeans suspect they will never die. CPF is stretched to 80 years, MediShield coverage might soon reach 90 years, and now UOB is extending 50 year loans. We have so much faith in medical science it’s practically a religion. But before you jump at UOB’s *ahem* affordable loan, you’d better think hard.
UOB’s 50 Year Loan
If you head over to UOB, you’ll see their maximum loan tenure is now 50 years. This is a huge deviation from other banks, which usually offer 30 years as the maximum.
The 50 year loan tenure applies only to private residences and HDB flats. Also, leasehold properties need to have at least 35 years left on the lease, at the end of the loan tenure.
The 50 year loan has its pros and cons. Before you jump into it, you’d better have a good grasp of both:
Upsides of the 50 Year Loan
The upsides to a 50 year loan are:
- It gives the borrower more liquidity
- It gives the borrower a bigger loan quantum
- It’s ideal for landlords seeking long term rental income
It Gives the Borrower More Liquidity
A 50 year loan offers greater liquidity. Because the loan is stretched over 50 years instead of 30, monthly repayments are lower.
For example, say you take out a $1 million loan at 1.7% interest. With a 50 year loan, the monthly repayment would be about $2,475. With a regular 30 year loan, it would be about $3,548*
*Numbers in example are from the Straits Times, July 20, 2012
Do I need to explain the benefits of having more money every month? You can invest it in stocks, put it into a fund, buy a pool table…whatever. Ideally, you should invest the money in a way that appreciates faster than the house.
It Gives the Borrower a Bigger Loan Quantum
Ever wanted to buy a house you can’t afford? Try a hard blow to the head, it sometimes restores common sense. If that fails, I guess you can try a 50 year loan.
Your maximum loan quantum (the total amount you’re qualified to borrow) is determined by your DSR (debt servicing ratio). It’s a ratio of your income to your overheads, and it needs to be roughly 50%. For example, if I make $5,000 a month, my DSR means my maximum overheads (including the loan repayment) can be about $2,500.
If I take a $1 million loan at 1.7% interest, for 30 years, I’d pay about $3,548 a month. That breaks the $2,500 limit, and the bank won’t extend me the loan.
But if I take a $1 million loan at 1.7% interest for 50 years, I’d pay about $2,475 a month. That’s within my DSR, and I now qualify for the loan.
Some young couples might see this as an opportunity. If they can get a higher loan quantum, they can bypass the HDB market and go straight for a private condo.
It’s Ideal for Landlords Seeking Long Term Rental Income
Let’s say you’re an investment banker out of an Ivy League school. At 30, you have a bank account bigger than Greece’s bailout package. Time to buy multiple properties and rent them out.
Because a 50 year loan reduces monthly repayments, it’s easy for your rental income to exceed your loan repayments. Going back to our example: A loan of $1 million suggests a private condo. It’s reasonable to expect rental income of around $4,000 a month.
If you’re on a 30 year loan, your monthly repayments are around $3,548. Your $4,000 rent generates a surplus of ($4,000 – $3,548) = $452 a month.
If you were on a 50 year loan, your repayments of $2,475 would generate a surplus of ($4,000 – $2,475) = $1,525.
Between the two, the 50 year loan results in a higher rental yield.
Downsides of the 50 Year Loan
The downsides to a 50 year loan are:
- It reduces capital gains
- It results in excessive interest payments
- Something called “retirement”, and how you might not have one
It Reduces Capital Gains
The capital gains (or capital appreciation) measures the growing value of a house. So if I buy a house for $1 million, then sell it 30 years later for $1.5 million, my capital gains would be $500,000. Right?
Yeah, when pigs fly. The interest from the loan repayments eat right into those capital gains.
At 1.7% interest, a $1 million loan would mean total interest payments of about $278k (after 30 years). So the actual gains would be ($500,000 – $278,000) = $222,000.
If you think that’s bad, bear in mind that longer loan tenure = more interest repayments. A 50 year loan might hit well over $430k in interest repayments alone. And that’s making some huge assumptions, such as the interest rates not rising for the next half a century.
Something Called “Retirement”, and How You Might Not Have One
Assuming you’re 30 when you get a 50 year loan, your last repayment is at age 80.
Let that sink in: A 50 year loan means you can settle down, raise children, put them through school, send them to University, rear three pets that die of old age, quit your job…and still be repaying the same loan.
I can think of body parts you can sever that would cause less pain. If you take up a 50 year loan, you’d better have a solid plan to refinance at some point. Because it is financially unhealthy to owe money past your retirement age.
As we near the retirement age of 62, our earning capacity decreases. Even if you work past retirement, you will probably earn less. Remember the sugar-coated bill passed in January 2011? Re-hired employees can have their pay cut by 10%.
(HA HA! “…the number of companies which automatically cut the salaries of workers is very small“. And also, China’s food products are the safest.)
Also, should you have financial difficulties over 50, this loan gets you in serious trouble. If you’re in your 30’s, the bank might work out a settlement that doesn’t involve foreclosure. But when you’re over 50, there’s a higher chance of losing the house.
Overall, it’s inadvisable to take this loan without very specific reasons. And if you want more advice on home loans, don’t forget to follow us on Facebook. You might also want to shop around for more reasonable loan packages before taking this one; there are sites like MoneySmart, which aggregates and compares loan packages for free.
Would you be willing to take on a 50 year loan? Comment and tell us about it!