Deferred home payments come at a price

The property market is hot right now, with demand rising, but not all buyers can or want to start paying for their property immediately.

They opt, instead, for a deferred payment scheme that lets them defer the bulk of the payment until the property’s temporary occupation permit (TOP) is ready and they can get the keys to their new homes.

The scheme - widely offered during the past few years - is under the spotlight after the Government said deferred payment might pose higher risks to developers and their banks.

The Monetary Authority of Singapore (MAS) said it expects banks to take these risks into account.

The news helped to push down property stocks on Thursday and led some people to worry that such schemes - which have become popular only over the past few years - could be tweaked or withdrawn.

Property developers largely adopted the practice in late 2001, apparently from the HDB market, where first-time buyers were allowed to make the 20 per cent down payment in two stages.

The market was sluggish then and the scheme was seen as a way to jump-start the action.

‘When times were not so good, the scheme was offered to every buyer!’ said a developer.

Opting for deferred payment allows buyers to put off paying the bulk of the price until the property is ready for occupation a few years down the road.

Those buying under the progressive or standard payment scheme must pay in tranches as construction proceeds.

There are various types of deferred payment schemes as developers can structure their own, subject to approval.

The most common scheme requires buyers to put 20 per cent down within eight weeks of booking, even though the minimum down payment required is 10 per cent.

Some developers ask for 10 per cent at the start and another 10 per cent about a year later, with the remainder due when the building is ready for occupation.

However the scheme is structured, it allows buyers to take up a loan, if needed, at a much later date.

But deferment comes at a price. Developers typically charge 2 per cent to 5 per cent more if buyers opt for deferred payment.

‘If you are very kiasu and think that interest rates are on the rise, you will want to lock in the rate now and save more on the progressive scheme,’ said a market watcher.

‘Your mortgage is based on your current income. If you were to lose your job in, say, three years’ time, you might not be able to get a loan.’

Some market watchers have said that deferred payment schemes could be fuelling market speculation.

‘With the scheme, you buy time so that you can find a buyer,’ said one.

Yet such schemes might make no difference to hardcore speculators confident of re-selling their property within a few weeks or months.

Developers have so far had few problems with deferred payment schemes.

While they can sue buyers for non-completion of contracts, few do.

In default cases, they are entitled to keep 20 per cent of the purchase price and can then re-sell the property.

The usual practice, though, is for buyers to sell the property in the sub-sale market, said a developer.

But developers can choose not to grant the deferred payment scheme to the sub-purchaser, he added.

Locking in rates

‘If you are very kiasu and think that interest rates are on the rise, you will want to lock in the rate now and save more on the progressive scheme. Your mortgage is based on your current income. If you were to lose your job in, say, three years’ time, you might not be able to get a loan.’ - A MARKET WATCHER

Source : Sunday Times - 15 Apr 2007