SIBOR OR NOT???

Between 1988 and Aug 2008, Interbank rates have almost reached 9%. During recession years of 2002 and 2005, interest rates hovered around 1%. However it has risen to 3+% from 2006 to 2007 only starting to fall dramatically back to around 1% in 2nd half of 2008.

Differences between 2002 to 2005 and 2008.

During 2002 to 2005, inflation are low, while in 2008, inflation is still high (~5-6%). This negative interest rate to inflation rate is typically rare. This could indicate intervention.

But then, nobody really knows where the rates will end up. If you cannot stomach the full risk, take some precaution such as a mix of Fixed Rate and Variable Rate mortgage to cushion the risk of fluctuation.

BANKS STEPS ON BRAKES ON LENDING

quote: "Success is a thought process"

Wachovia Corp. A big regional american bank lender has stopped Offering option adjustable-rate mortgages, which let borrowers skip part of their payment and add the balance to the principal. According to Robert Steel, the Charlotte, North Carolina based bank is "tapping the brakes" on risks.

Banks worldwide are indeed becoming more cautious, not less.

That means some people who do not qualify for refinancing with other banks may be stuck with an existing bank. Many banks in Singapore tend to charge a lower interest rate to acquire new customers and in latter years charge more to either recover their profitability.

As interest rate directions especially the SIBOR cannot be accurately predicted, it is safe to say that for some people, certainty of a fixed rate mortgage for a number of years gives them ample time to react to any crisis.


Source: Morningstar.com

As you can see from the chart of 3-month Libor (The London equivalent of Sibor) rates over the past 20 years. It can go as high as 20%.

Many banks are increasingly providing Sibor Plus packages to home owners (Sibor + margin%). While it can offer lower rate in the short term, it can be highly dangerous when a credit or liquidity crisis comes.

Now the question to ask yourself. Can you afford your installment when interest rate hits 20%?

BUYING A PROPERTY IN GEYLANG

quote: "Success is a thought process"

Recently in 2007, a friend of mine bought a property in Geylang. The property is in decent condition, it's Freehold and it is about 1000 square feet. With all the promises of KALLANG Expansion and being near to the city, etc. It seemed too good to be true at S$400,000. She was planning to lease it out for S$1500/- per month.

So here is the calculation: -

Rental revenue --- S$1500 x 12 months = S$18,000
Downpayment 20% --- S$80,000
Cost of Financing S$320,000 @ 2.5% --- S$8,000
So the Return of Investment --- (18,000 - 8,000) / 80,000 = 12.5%

So 12.5% gains is quite OKAY right?

So she went to the bank and tried to borrow money, the banks told her, sorry you have to pay 30% to 35% downpayment.

NOW, new calculation: -

Rental revenue --- S$1500 x 12 months = S$18,000

Down payment 30% of 400k --- S$120,000

Cost of Financing S$320,000 @ 2.5% = S$8,000

So the Return of Investment = (18,000 - 8,000) / 120,000 = 8.3%

Where are you going to get that extra S$40,000 all of a sudden.

People can avoid these pains if they get a PRE-APPROVED LOAN. Just provide the unit number, development name, the banks can usually reply to you in 1-2 days to give you a YES/NO answer. Do bear in mind that some banks may say NO and you have to go check with some other banks and wait some more days. So it is a tedious process. A Independent mortgage consultant such as

http://www.propertybuyer.com.sg or info@propertybuyer.com.sg
can quickly help you get a loan pre-approval (and subsequently get you the best fit loan). So you can put your heart at ease to buy the investment property/home of your dreams.

This is just a simple calculation which does not YET include the Rental property tax of 10% p/a. Conservancy charges, maintenance and depreciation of property as most tenants will want you to re-furbish it, and it can cost $$$. Don't forget stamp duty, lawyer's fees, fire insurance, surveying cost, etc.

DON'T RISK IT, get pre-approved loans first before signing the option to purchase.