Is it usually good idea to stretch a home loan as long as possible?

quote: "Success is a thought process"


20 years Interbank Interest rate chart (1988 - 2008) - Adapted from MAS, by Paul Ho Kang Sang, www.propertybuyer.com.sg (info@propertybuyer.com.sg)

Recently i was also offered a 3-month sibor package where the monthly installments are fixed, but the principal paid varies with the interest rate.

I think it sounds like a good package as there is some certainty in the amt of monthly installments paid, but any potential pitfalls from this? And the equity accumulation is quite slow due to the length of loan.

Dear Home Buyer/Owner,

To answer your first question. It is important to understand whether you treat the property as a single home, an investment property or simply a property in which you can use as a collateral for your business.

Different people may react differently as a property can be an emotional issue/decision.

AFFORDABILITY
For some it is an affordability issue, therefore stretching the home loan will allow you to stretch your budget to buy the home of your dreams.

COST / FINANCIAL CONCERNS

Stretching the home loan incurs higher total interest cost. However some investors have been known to stretch the home loan as long as possible to maximize their return on invested capital (If this area is of interest to you, I can elaborate more). Longer term loans tend to be more costly because all loans are structured in such a way that mostly interests are paid during the earlier years. So you will see that your outstanding loan amount seems to be standing still.

On the other hand, some people may opt instead of 30 years, to take a loan of 20 years and at the end of every 2 years, they take another 20 years loan, such that the total repayment may still be 30 years, but they end up paying lesser interest. But it is rather troublesome and few people are inclined to do it.

3-Months Sibor with Fixed repayment structured. In this case, the total interests are variable and re-priced every 3 months, higher Sibor means you pay more interests and less principle. But you have some peace of mind such that you don't have to worry about how much to pay, though you are deferring the cost till later to smooth over short term financial flexibility. Over a 20 year period, interbank rates (Sibor) Singapore dollar Sibor has approached reached about 9% in around 1990. If you are paying Sibor + 0.9%, that would mean you are paying almost 10% interests. Fed overnight rates has gone as high as 20% during the recent financial crisis in which banks stop lending to each other or tightened credit drastically. So markets such as the Libor (London), Sibor (Singapore) are technically not immune to fluctuations in the market and liquidity crunch. And as a rule of thumb, a 3-months Sibor fluctuates more than a 6-months Sibor. While the 1-month Sibor is more volatile than the 3-month Sibor

There are quite a few fine prints which you need to note, it could be a Legal fee clawback or lock-in period penalty. Or other forms of administration fees.

If the loan has no lock-in period, then you are largely open to interest rates shocks (if any). Though Singapore market is generally flushed with liquidity and hence low GDP (economic growth) tends have also have low interest rates, but that cannot be taken for granted. We have seen first hand in the US, whose markets have much more depth and yet the funds dried up when banks tightened credit, leading to sky high interest rates. In fact, the Federal Reserve (FED) has to intervene to pump money into the market to reduce the interest rates as seen in the Sub-prime fiasco.

Where is Interest headed?
There is likelihood that interest rates may stay low (same as 2002 to 2005), but this time, there is some marked differences, the M1 money supply is much higher in Singapore. In fact the money supply has grown much faster than the economy in Singapore since around Dec 2006. From 2003, to 2008, money supply M1 doubled. Surely this money will absorbed into the economy over time if they are not being brought outside of the country, hence this is one of the many possible reasons that the Singapore market is rather resilient.

There is also some risks that US bail-out of private enterprises and banks to the tune of almost 1 trillion (1000 Billion USD), plus US annual trade deficit of over 500 Billion (http://www.census.gov/indicator/www/ustrade.html), the USA cannot afford it.

Even China with the largest reserves on earth to the tune of US$1+ trillion cannot afford to bail USA out (considering that much of this research is already in US government bonds and other financial instruments). Collectively USA corporations are very rich, but there is no way the USA government can make them come out with any money.

There is a real risk that USA might expand money supply (aka print more money), there may be elevated inflation risks and therefore interest rate hikes possibilities. Because money supply takes time to filter down, there is usually a time lag effect. Right now, it's anybody's guess. But within 6 months to 1 year my personal opinion is that it will stay at current levels, perhaps with a little room for slight drop.

The reason why USA is important is because the US market accounts for ~14 Trillion USD in GDP, or about 25% of the world's total output. THe link on GDP, http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

You can ask me more at info@propertybuyer.com.sg or to the site: -

www.propertybuyer.com.sg

BANKS TIGHTENING CREDIT CAUSES HOME OWNERS PAIN

quote: "Success is a thought process"

CNN money reported that Credit Crunch has begun to hit small businesses. Banks are tightening credit discriminately or indiscriminately. That means, on the balance, the small businesses and individuals refinancing their homes will suffer. For existing home loans, banks may be able to lock users in for longer period of time (not by contract, but by lack of alternative options) as home owners are unable to refinance for a cheaper rate elsewhere.

This will significantly hurt home owner's disposable income. As if the problem is NOT BAD enough, over 70% of the US GDP depended on consumption and may directly cause the US economy to slip.

This must be one of those over-shoots and under-shoot moments where all bad things converge at the same time.

And if you lose your job, banks will certainly NOT ENTERTAIN you. While you are stuck with a higher repayment interest rate, you have no option to refinance because banks generally scorn on "ZERO INCOME" unless you have large equity in your home based on the most ULTRA conservative estimates.

email me at loans@propertybuyer.com.sg for a free un-biased mortgage health check (Singapore only).
www.propertybuyer.com.sg

Below CNN Money (By Emily Maltby - 15th Sep 2008)
Credit crunch hits small businesses
If the inability to land a bank loan is preventing you from expanding, you're not alone.

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(CNNMoney.com) -- Stephani Smith's Maui-based healthy meals delivery company had been thriving since 2004, but needed financial assistance to expand its marketing efforts and Web exposure.

"I was the type of business that in times like this people have to cut out," she explains. "More and more people had to let go of the convenience we offered to save money and instead make their own dinners, pack their own kid's lunches, do their own grocery shopping and eat less organically."

Smith approached Leili McKinley of Haiku, Hawaii, business consultancy Soaring Phoenix in February 2007 to get advice on procuring a bank loan that she believed would help her boost business in a tough economy. With a good credit score and a business partner who had connections with a corporate officer at American Savings Bank, Smith would be a shoo-in for a loan, McKinley thought. So Smith reached out to ASB and Central Pacific Bank (CPF) for help.

"But the banks stalled on her," McKinley said. "Every time we called, it was something different - lost paperwork or required documents that had never been asked for. It seemed that their tactic was to see for how long she could survive without the loan before considering her."

She couldn't. After months of holding on, Smith folded her business.

Around 65% of domestic banks say they have tightened their lending standards for commercial and industrial loans to small firms over the past three months, according to the July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, released in August from the Federal Reserve System. That's up sharply from the 50% of banks reporting tighter credit in the April edition of the quarterly survey.

The National Federation of Independent Businesses' most recent Small Business Economic Trends report sings a different tune, saying that that the credit crunch is a Wall Street-only issue. Thirty-four percent of the survey's August respondents, a selection of NFIB members, reported regular borrowing activity. That's in line with historical trends, although 10% said loans are getting harder to land. Only 2% of the owners polled cited the cost and availability of credit as their number-one business problem, far from the record 37% in 1982.

Bill Dunkelberg, chief economist for the NFIB criticized the Bank Lending Practices report's findings, noting that the 52 banks surveyed represent the largest banks in the nation. As chairman of Liberty Bell Bank, a small bank in southern New Jersey, Dunkelberg believes that smaller banks, which cater more to small businesses than to large ones, are doing just fine.

"As a small bank, we're not borrowing deposits to lend out or any of that fancy schmancy stuff," he said. "We have the savings accounts of the little people and we're lending out to them."

But Maria Coyne, executive vice president of community banking for KeyBank (KEY, Fortune 500), a nationwide midsized lending institution, sees banks everywhere clamping down. Even smaller banks that avoided the risky gambles that have decimated Wall Street are hit by the ripple effects of major crashes like Bear Sterns and Lehman Brothers (LEH, Fortune 500).

"Most banks are safe and sound, but these unprecedented times are affecting everything that has to do with banking," she said. "Stock prices have depressed, capital costs have increased, and regulators are more focused on capital adequacy ratios -- even for banks that didn't do sub prime mortgage lending." Banks still want new clients, but Coyne sees them being ultra-cautious.

iReport: How's your business faring?
Credit availability is a mixed story right now, according to Ray Keating, chief economist for the Small Business and Entrepreneurship Council, a small-business advocacy group in Oakton, Va.

"If you are dealing with a bank that isn't in trouble and you have a good track record and relationship with that bank, you'll have less of a problem getting a loan," he said. "But it's only expected that they will want more information to prove to regulators and investors that the loan is worth it. That means that it's a heck of lot tougher for startups and small businesses without track records to get loans."

Entrepreneur Delphine Humphrey, founder of the Mikado Kids Drop Inn childcare center in Arlington, Texas, found financial institutions reluctant to loan her start-up capital despite her great personal credit and a strong business plan developed with the help of experts at her local small-business development center.

"I cried myself to sleep several times," she said, recalling the past year. "We tried four banks and after getting rejected from all four, we decided to get creative." After three months of searching, Humphrey secured a loan from microloan organization Accion Texas. She will open the doors of her daycare for the first time this week.

Tulsa-based business coach Bill Bartmann says it's clear that banks are treating people differently. "They've changed their standards," he said. "They want to see what value you can bring to the bank."

Michele Larson, also a client of McKinley's on Maui, wanted to expand her one-year-old fitness center to another island. She, unlike Smith, procured a loan, but had to jump through hoops with three banks just to get a proposal.

"She was sitting on heaps of cash and had a perfect credit score," McKinley said. "Three years ago, the banks would have come back to her within 30 days. But instead they grilled her on balance sheets, business plan and personal finances for months."

Six months after the time she applied, the bank came back with outrageous terms on the loan. "The conditions were terrible. Basically, the bank wanted to control all my money," Larson said. "Also, there were no fixed rates and at the end of the fiscal year, I had to pay an additional 25% of excess cash flow back to the bank. Thank goodness for my accountant, who helped translate all the jargon and caution me."

Business coach Bartmann, as well as KeyBank's Coyne, emphasize that an entrepreneur's relationship with their bank can make or break a loan today. "It can differentiate you from all the other small business owners who walk into the same bank vying for the same money," he said.

And yet the NFIB remains adamant: "Credit has tightened ever so slightly since 2003," Dunkelberg said. "But there's no seizing up of markets - nothing is frozen on Main Street."

Over on Maui's main street, the view is grimmer. "I'm really shocked that large organizations whose constituents are small businesses are saying that the credit crunch is only affecting Wall Street," McKinley said. "It just seems really off target."

First Published: September 15, 2008: 11:13 AM EDT
Have you had trouble getting a bank loan? Join the discussion.

Market bets that the FED will lower rates

quote: "Success is a thought process"

When the U.S.A. sneezes, the rest of the world catches a cold. Singapore is right smack in the middle of that sneeze as Trade (Import/Export) makes up a large percentage of Singapore's Economy. Weakness in the USA directly impact the economic outlook of Singapore. Major markets are expected to lower rates in expectation of a forecasted slowdown (Source:IMF) of growth worldwide. Interest rates may stay low for at least in the 2009.

Most banks in Singapore charge a Step-by interest rates in which you pay lower interest rates in the 1st year and move on to higher interest rates in the 2nd and subsequent years. In a refinance scenario, the other bank takes over the outstanding loan balance from the previous bank.

However, banks are tightening credit the world over.

If you are expecting some changes in personal circumstances, you may not qualify to refinance your home to get better offers and end up paying elevated rates if the following occurs: -

YOU LOSE EMPLOYMENT
YOU SALARY IS REDUCED
YOUR PROPERTY VALUE DROPS
CREDIT TIGHTENING in general

It may be advisable to get a free mortgage health check to determine your risk level.



Source: IMF, http://www.imf.org/external/pubs/ft/survey/so/2008/RES012908A.htm

"In Western Europe, signs of a future slowdown in credit growth are just now emerging and there is some potential for worsening credit quality as lending has been very robust in some countries and several countries face housing markets considered overvalued, the IMF warned.
Lending in some segments of the corporate sector also expanded rapidly in the first half of 2007 with the rise in leverage buyouts. Weaker quality corporates have already seen a substantial rise in the cost of credit although yields investment grade debt have remained relatively stable. Additionally, a slowing economy will likely exacerbate the tighter credit environment further as unemployment picks up and job growth slows.
Emerging markets have been resilient so far, but face challenges ahead. Emerging market equities have outperformed mature equity markets, but prices in some markets have declined steeply since the start of the year on expectations that the U.S. economy may slow more rapidly. "Signs of spillover are most evident in the sharp fall in private emerging market bond issuance, particularly in some emerging European economies whose banks have relied heavily on external financing to support rapid domestic credit growth," the Financial Market Update stated. Generally, flows to emerging markets have remained positive up to now."

REFERENCE:
CHICAGO (Reuters) - U.S. short-term interest rate futures rose sharply on Monday to reflect higher prospects for a rate cut at or before Tuesday's Federal Reserve policy meeting.

Dealers responded to a fresh crisis in financial markets after investment bank Lehman Brothers filed for bankruptcy over the weekend, and to sharply lower calls for the U.S. stock market.

The Federal Open Market Committee holds hold a regularly scheduled meeting on Tuesday.

Implied prospects for the Fed to lower the benchmark fed funds rate to 1.75 percent traded as high as 92 percent and have now subsided to 72 percent. On Friday, prospects for a September rate cut were a slim 12 percent.

A single, quarter-point rate cut is fully priced by the December FOMC meeting.

"It looks like the market is looking at just a 'one and done' scenario," said Rudy Narvas, analyst at 4CAST Ltd in New York.

The Fed late on Sunday announced several measures aimed at mitigating strains in financial markets.

Those moves included enlarging the range of available collateral for the Primary Dealer Credit Facility and the Term Securities Lending Facility.

"It is only prudent to consider all available tools at the Fed's immediate disposal ... The option of adjusting the funds rate per se is probably not at the top of the priority list," said Thomas Lam, senior Treasury economist at United Overseas Bank Group in Singapore.

(Reporting by Ros Krasny; Editing by James Dalgleish)