We have entered week 5 of the circuit breaker. This unexpected break in our regular rhythm of life has brought inconvenience to many and also real challenges to some. For some who work in industry severely affected by the circuit breaker measures, livelihood will also be severely affected.
Personally I have encountered several episodes of financial difficulties caused by external circumstances that were beyond my control.
Having hustled through these episodes I have learnt that in every problem there will always be a solution. Through taking the right steps and some creativity you can always emerge from the valley stronger and wiser.
I hope this article can be of help and encouragement to property owners who might be going through a tough time.
The following is a quick highlight of 5 ways you can use your property to navigate financial difficulties during a Crisis. In each method, I will share how it works, and who can apply it.
Gear up with low interest to tide over
Refinance your mortgage loan / stretch Loan tenure
Defer Repayment For Residential Property Loans
TDSR Waiver for Loans with Loan to Value (LTV) under 50%
Restructure your property portfolio
Gear up with low interest to tide over
How does it work?
This Gear up is also known as Home Equity Loan.
This loan works for property that has increased in value over time.
In theory, the formula for equity loan is as follows
Equity Loan Amount = 75% of Current Value of Property - Outstanding Mortgage Loan - CPF Used
For example:
Sam purchased a 3 bedroom Condo at Trevista located at Toapayoh in 2009 at $1mil.
The property value has appreciated to $1.5mil in 2020.
He has an outstanding loan of $500k
Sam can take up an equity loan based on the appreciated value of $1.5mil.
The amount of loan Sam can draw out is as follows
75% x 1.5mil - $500k = $625k
Sam can draw out this lump sum of $625k to help him with cash flow in his business.
The cost of equity loans are similar to mortgage loans and go as low as the range of 1.3% to 1.7% at this current period.
The loan tenure will also be similar to that of a mortgage loan. This means that Sam’s monthly mortgage instalments have increased due to the higher loan that he has drawn out, however the lump sum can help solve his financial issues.
Who can apply this method?
Private residential owners who has an income / sufficient assets to pledge.
Equity loan is not applicable for HDB owners.
Things to note
CPF funds cannot be used to pay for equity loan instalments, only cash is allowed.
When you sell your property while still servicing the equity loan, it is important to confirm the loan redemption date with your banker and make sure the completion date of your sale falls on the loan redemption date, as completing before or after the specific date will result in costly penalty fees.
2.Refinance your mortgage loan / stretch Loan tenure
How it works
The main objective of this method is to reduce the amount of cash you need to use to pay for your monthly mortgage instalments.
This can be achieved by
refinancing/reprice, that is changing your mortgage loan package to one with a lower interest rate.
Stretch out your loan tenure, that is to extend the number of years used to pay for the loan.
Interest rate is at an all time low and this is a good time to either reprice or refinance your mortgage loans to create some wiggle space in your finances.
For property owners not restricted by lock-in period, you have better flexibility and choices to refinance with different banks that offer the most competitive rates.
For property owners who are still serving a locked-in period for your mortgage loan you can speak with your banker to do a repricing of your loan package.
Let’s look at an example of the difference in instalment paid before and after refinancing and stretching of tenure.
Kenny has an outstanding Loan at $500k at 2% interest
with a loan tenure of 15 years.
Currently he is paying $3218 in monthly instalments
After he refinance to a loan package at 1.3% interest and stretch his loan tenure to 35 years (extend by 20 years) his monthly instalments is reduce to $1,482
Difference in loan instalment before and after refinancing and stretching of tenure
$3218 - $1482 = $1736
The advantage of this method is that it gives Kenny a “wiggle room” of $1736 cash, which takes some financial pressure off servicing the loan.
However by using this method, also note that this increases the amount of interest that he is paying over a longer period.
Hence it might be wise for Kenny to do another refinance when his finances is in better shape if he wants to pay less interest.
Who can apply this
Both HDB and Private Property Owners who have existing mortgages loan
As this is a secured loan, the borrower will need to have income / cash to pledge to get the loan
Things to note
Loan tenure can be stretched to 35 years or until borrower is 75 years old
Banks require a minimum loan amount, usually above 100k, do check with the banks to see if your loan amount meets the minimum requirement.
While a lower monthly instalment is an attractive proposition, you should take note of the interest that you will be paying in the long run if you are stretching the loan tenure
3.Defer Repayment For Residential Property Loans
Mas has allowed banks to defer mortgage payments until 31st Dec 2020
How does it work?
From 6th of April, you can request to defer your monthly home loan repayment.
You are able to defer the repayment until 31st December 2020
Firstly, understand that there are 2 parts to loan repayment, Principal Repayment and Interest.
According to the guidelines from MAS, There are 2 ways loans can be deferred during this period.
Interest will accrue only on deferred principal amount , no interest will be charged on the deferred interest payments.
(i) Defer Principal
If you choose this option, you will only be paying the interest for the loan.
This means the principal portion of your loan remains the same, and you will be charged an interest on the principal when your normal loan payment resumes after 31st December 2020.
Taking Kenny from the previous example.
If Kenny chooses to not refinance, but defer his principal payment.
Current Situation
Kenny has a loan of 500k at 2% interest.
Monthly instalment: $3218
Principal: $2406.67
Interest: $811.33
Defer loan repayment till 31st December 2020
Pay interest only for 8 months (may-dec) : $6490
Payment per month:$811.33
After 8 months, as the principal is not paid, Kenny still owes the bank $500k.
He will have to pay the 500k that he borrowed + interest when the normal payment resumes. This means that $6490 that was paid is additional cost to defer the loan payment
When normal repayment resume, his monthly instalment will be back to principal repayment + interest.
(II) Defer Both principal and interest payments
If Kenny choose this option he defer his loan payment totally and pay after the 31st December 2020.
As interest will only accrue on deferred principal amount, this means when normal payment resume, Kenny will have to pay higher monthly instalments as his monthly instalment will consist of principal repayment + interest + additional interest (may-dec where he only paid interest)
Who can apply this ?
Individuals with residential loans may apply to their respective banks or finance company
Things to note
Lenders will approve request for applicants who is not in arrears for more than 90 days as at 6 April 2020
You do not need to show any proof of loss of income due to COVID-19 to obtain the deferment
Click on this link If you like to find out more about the MAS measures that can help individuals and SME to tide through tough times.
4. TDSR Waiver for Loans with Loan to Value (LTV) under 50%
How Does it Work?
The method allow owners to draw out equity loan of up to 50% of the property value without the need to fulfil income requirements.
Who is able to use this
Private property owners with fully paid up properties
Things to note
Not all banks are open to TDSR waiver, if you like to explore this option will be best to work with a mortgage broker to avoid knocking on the wrong doors.
5. Restructure your property portfolio
Crisis time is also an opportune time to seize good deals in the property market. You can choose to ....
Rent out your spare room
The easiest and fastest way to generate some cash.
Rent out your current property and rent another property with a lower rental.
You can cash out on the difference in rental.
Sell your current property and purchase a cheaper property.
If you are able to identify a good price purchase, buying a lower price property is a good way to cash out on your current property and still own an asset.
Sell your current property, rent temporarily
If buying proof to be challenging due to current financial difficulty, renting is a good short term solution while you pick yourself up and place yourself in a better position to purchase again. You might even get a good deal with timing and opportunity is in your favour.
Who can apply this ?
HDB and Private Property owners who does not find refinancing as suitable option for their needs
Things to note
- It's important to establish clear objective when looking to sell and buy, while it can be a stressful time, rationally work out the numbers before taking action. You may read my previous article to get better insight on things to look out for in your next purchase.
There is always a solution to every problem, light at the end of the tunnel.
I hope the 5 solutions are helpful for you! Have a burning question? Hit me up in the comments box or drop me a whatsapp or email if you prefer privacy!
About The Author
Chantel Teo is fiercely loyal, insatiably curious and always hungry.
A licensed real estate broker based in Singapore.
She has transacted properties with a combined value of more than $60 million, from Tanjong Pagar to Orchard to SengKang to Bukit Panjang. In the journey of helping her clients, buy, sell, lease and manage their properties, she has collected many stories and life lessons.
She writes as a form of catharsis and connection. Through her writing she hopes to share practical and useful insights as well as stories that can enrich her readers.
Buildings and houses is her passion and she has a special love for walk up apartments and buildings built before the 90s, probably because of the character, charm and history that comes with these buildings. Besides buildings that can stand the test of time, she also appreciates the cultivation of personal substance and character that endures.
One of her favourite quotes goes
“Character, in the long run, is the decisive factor in the life of an individual and of nations alike” - Theodore Roosevelt. Her belief is that good character will be a solid foundation which she builds her career and the people around her.
When she is not hustling at work, she enjoys nice coffee, hearty meals, long walks and a good read. She also has a soft spot for all things furry.