ST Forum : Uncertainties buyers must navigate

20 JAN 2011,

NEW PROPERTY MEASURES

Uncertainties buyers must navigate

THE measures aimed at cooling the property market have introduced an element of uncertainty for home buyers ('New measures to curb property speculation'; last Friday).

The measures will increase a seller's stamp duty, payable for up to four years from the date of purchase of the property. This will effectively reduce the amount available to the owner to settle the bank loan and have a surplus.

Although the Government may consider waiving the stamp duty in hardship cases, especially if they are health-related, a waiver is unlikely if a forced sale is precipitated by the owner's loss of job, inability to rent or increased interest costs.

For example, an owner who must sell his property in the first year of purchase must deduct the seller's stamp duty of 16 per cent from the proceeds. If he had obtained a loan of 80 per cent of the purchase price, he would have only enough to pay off the housing loan. His equity would be almost wiped out.

The new rules also imply another aspect to an owner's uncertainty. A loan-to-valuation ratio of 80 per cent does not mean the bank has a 20 per cent security margin during the first four years of the loan.

The seller's stamp duty will force banks to live with a razor-thin margin of 4 per cent for the first year, and the hope that property prices remain buoyant enough to improve the margin over four years.

But such an uncomfortable margin may affect a bank's willingness to lend as it will not enjoy the usual security buffer, as it did previously in the initial four-year loan period.

Currently, the valuation of properties is very close to the purchase price, but banks may well turn conservative if prices are expected to soften.

Apart from a lower valuation, banks could insist on a bigger margin to preserve their security margin.

Banks could also become stricter and more cautious in approving borrowers, to avoid potential default during the initial loan period. So marginal borrowers could be weeded out or be unable to obtain a loan at the desired amount.

The net result: Buyers may be asked to fork out more cash upfront to make up for the difference in valuation and purchase price and to enhance the bank's security margin.

So it is vital for buyers to do their sums scrupulously to ascertain their debt-servicing ability. They should seek a firm commitment from the bank on the loan quantum, to avoid nasty surprises arising from the valuation of the property offered as security and the margin of financing.

Kuo How Nam
President
Credit Counselling Singapore